Homeowners face fresh mortgage misery after rates surpassed the peak seen in the wake of Liz Truss’s disastrous so-called mini-budget last autumn – hitting the highest level since the 2008 financial crisis.
As the Bank of England’s recent interest rate hikes push up the cost of borrowing, average two-year fixed-rate deals reached 6.66 per cent on Tuesday, according to figures from Moneyfacts.
On October 20 2022, amid the turmoil that followed Ms Truss and Kwasi Kwarteng’s budget, the average two-year fixed-rate mortgage hit a peak of 6.65 per cent. Mortgage rates now stand at a level not seen since August 2008 at the height of the global financial crisis.
The latest increase will pile pressure on homeowners, with millions of mortgage deals to expire before the end of next year.
Rishi Sunak acknowledged “things are difficult” for families struggling with rising mortgage rates, but backed the Bank of England’s hikes, saying curbing inflation is “crucial”.
But economic data showing wages climbing by a joint record 7.3 per cent in the three months to May will pile pressure on the Bank of England to raise rates even further.
James Smith, research director at think tank the Resolution Foundation, told The Independent: “This is feeding into higher mortgage rates, which have now hit their highest level since the financial crisis, and an even deeper mortgage crunch across Britain, with the 1.7 million households needing to re-fix next year likely to see their repayments rise by over £3,000 on average.”
Chancellor Jeremy Hunt and Bank of England governor Andrew Bailey called on Monday night for wage restraint to help control inflation.
Also in a bid to curb spiralling price rices, the Bank of England last month hiked interest rates by 0.5 percentage points to 5 per cent, leaving homeowners scrambling for ways to meet rising loan repayments.
It had been expected to push up rates again at a meeting in August, with Tuesday’s wage growth data making further hikes even more likely.
There is currently a knee-jerk reaction on policy, but no coordinated plan
Professor Abhinay Muthoo
But Professor Abhinay Muthoo, a fellow at the National Institute for Economic and Social Research, urged the Bank of England to avoid a knee-jerk reaction.
He called on Mr Bailey to set out a “coordinated, 12-month plan” of how the central bank will bring inflation back under control.
“It is currently chasing its tail, but what is missing is a plan of how they are going to bring inflation down in the next year,” he told The Independent.
Professor Muthoo said: “There is currently a knee-jerk reaction on policy, but no coordinated plan.”
Professor Muthoo also called on Mr Sunak to show some “flexibility” on his key pledge to halve inflation.
Instead of being “dogmatic” about the pledge, professor Muthoo urged the prime minister to “think of imaginative ways to support people through this crisis”.
“Being flexible is key, rather than dogmatically sticking to priorities, the government needs to think sensitively about what is happening to people on lower incomes and those with large mortgages.”
Mr Sunak admitted inflation is “proving to be more persistent than people thought” but said this does not mean his course of action is “wrong”.
Speaking to broadcasters in Vilnius, the prime minister said: “I know things are difficult for many families across the country. The UK is not alone in experiencing a rise in interest rates… the crucial thing that we have to do is bring inflation down.
“That’s how we’re going to ease the burden for families. That’s how we’re going to stop the rise in interest rates. And that’s why my priority is to halve inflation.
“Of course, that is proving to be more persistent than people thought, but that doesn’t mean the course of action is wrong. We’ve got to stick to it.”
Tory MP Lucy Allan, who warned in June that Britain was heading for a “mortgage catastrophe”, told The Independent a change of course was needed.
Ms Allan said it was “difficult to see the economic logic” of hitting a fifth of the population with rapidly rising mortgage bills.
“They don’t seem to understand that it doesn’t work like that anymore,” she added.
Ms Allan said those on long-term fixed mortgages are “unaffected” and blasted a mistaken assumption that those with mortgages are wealthy and have disposable income.
She added: “If you are a mortgage holder, not on a long term fixed rate, you do not have disposable income. You are begging and borrowing from friends and family to pay your mortgage or making plans to sell your family home.
“The Government needs to reign in its spending.”
And she called for a “thorough reappraisal” of the role and function of the Bank of England, claiming it is “not working for today’s economy”.
Labour accused the government of hitting households with a “mortgage bombshell”.
Shadow housing secretary Lisa Nandy said: “Too often, families who are saving for their first home but getting no closer to buying it feel like they’re doing something wrong.
“Millions are feeling the pain from this Tory economic failure.
“But the fact of the matter is that the Tories have inflicted households with a mortgage bombshell, let renters down and failed to build the homes we need.”
And Riz Malik, director of Southend-on-Sea-based independent mortgage broker R3 Mortgages, said the government and Bank of England are equally to blame for spiralling mortgage rates.
Mr Malik said: “With average 2-year fixed rates hitting 6.66 per cent, many homeowners will be in a personal hell.
“The government and the Bank of England are equally to blame for this mess. As rates surpass the rule of Truss and Kwarteng it’s only fair that Sunak, Hunt, Bailey and the whole MPC suffer the same fate.”
The latest figures came as mortgage lenders faced a grilling from parliament’s treasury committee on rising rates, house prices and forbearance.
Santander UK’s mortgage director Bradley Fordham told MPs that arrears, or households struggling to keep up with mortgage payments, were at “relatively low” levels, despite a “small uptick”.
He added that customers coming off deals and going onto new ones were seeing their monthly payments increase by over £200 per month.
Nationwide Building Society’s Henry Jordan told the committee its customers were seeing monthly payment increases of around £235.
Mr Hunt recently unveiled a so-called mortgage charter, agreed with Britain’s leading banks, to help struggling borrowers. It includes a commitment by lenders to help customers access payment holidays, switch to interest only payments or extend their repayment terms.
Mr Fordham told MPs on Tuesday that less than 4 per cent of customers had inquired about “mortgage charter-type solutions”.
