Why are mortgage holders pressured in Britain?

Every six weeks, at noon on a Thursday, mortgage holders in Britain brace for more bad news. It is the moment when the Bank of England’s latest interest rate decision is announced.

For a year and a half, the central bank raised interest rates at every meeting as policymakers tried to stamp out soaring inflation. With each increase, millions of Britons are getting ready to put more of their money into their monthly home loan payments and cut back on other spending.

A decade of low interest rates, followed by a rapid rise in rates, has upended budgets across the country. Alarm is running high among affected families, charities are vulnerable, and politicians are heading into next year’s election.

Many people in Britain have fixed-rate mortgages for only a short period, usually two or five years, unlike mortgage rates in the United States, which are often fixed for 30 years. The average interest rate on two-year fixed-rate mortgages has risen to the highest level since 2008.

At the end of the set period, mortgage holders can shop around for different offers, usually choosing between a variable rate mortgage–which can move up and down as often as the lender decides or with interest rates–or another fixed-rate loan. Many people hold back rates of less than 2 percent and are now facing conditions above 6 percent.

In Britain, one of the direct ways that higher interest rates affect people is through higher mortgage rates, but the effect varies greatly between the population.

Just over a third of households own their homes outright, so they’ll be insulated from rising mortgage rates. About the same percentage are renting their homes, and many of them have already faced significant rent increases. The rest – 28 percent of households – have a mortgage.

On average, households with mortgages would pay roughly 280 pounds (about $365) each month, if mortgage rates remained at their current levels, compared to March 2022 rates, According to the Institute for Fiscal Studies. The research organization said the burden would be more difficult for those under 40.

To some extent, luck — or bad luck — will determine how painful the jump in mortgage rates will be for the family, because it will depend on when the fixed-term interest rate expires.

Homebuyers’ decade-long shift away from variable rates to fixed-rate mortgages means that many people don’t feel the interest rate hike right away. But the longer the rates stay high, the more people will need to sign up for the higher flat rates.

By the end of this year, about three million mortgage holders will see up to 500 pounds ($650) a month added to their payments, the Bank of England estimates.

The bank said that about 4.5 million households have already seen increases in payments since the Bank of England began raising interest rates in December 2021, and that another four million will be affected by interest rate hikes by the end of 2026. But the central bank assesses the financial situation. The burden will still be less than it was during the 2008 financial crisis.

“It’s a difficult situation facing individual households who have to refinance,” said David Muir, chief economist at Moody’s Analytics. “They are facing, in some cases, very sharp increases in payments because of how much higher the interest rates are compared to the level at which they were initially set.”

Mr Muir added that this would reduce their spending power and affect the country’s economic growth. But he said British households are less indebted than during the financial crisis, so there is less risk of property being returned and lenders are better able to help.