In an alarming trend, more than half of the United Kingdom’s low-income households with mortgages are struggling to keep up with their bills. This distressing situation is primarily due to the recent spike in interest rates set by the Bank of England and the soaring inflation rates, according to the latest research findings.
A Deepening Crisis
A recent survey conducted by the Joseph Rowntree Foundation charity has laid bare the stark reality faced by less affluent UK families. In October, a whopping 58% of these households reported difficulties in paying their bills, a significant jump from 49% in the previous year. Even more concerning is that over half of these struggling families are in arrears with four or more household bills.
The Double Whammy: High Interest Rates and Inflation
The research, which was shared with the Financial Times, points to the impact of an unprecedented series of interest rate hikes by the Bank of England. The central bank has raised rates 14 times consecutively, leaving the target rate at a towering 5.25%—a figure not seen since the financial crisis. This has occurred alongside a surge in consumer prices, which has outstripped the growth in household earnings.
Although there was a noted decrease in inflation in October, experts warn that the aftermath of two years of rapid price increases will continue to burden the economy, hitting poorer families the hardest.
The Renters vs. Mortgage Holders Dilemma
Interestingly, the research, which surveyed 4,053 respondents in the bottom 40% of household incomes, reveals that less affluent mortgage holders are now more likely to be behind on bills or credit commitments than those renting privately. The survey was conducted by Savanta between October 12 and 31.
A staggering 76% of homeowners with mortgages admitted to forgoing essentials like food, energy, and warm clothing due to the rising cost of living.
Loan Rejections and the Credit Crisis
The situation is exacerbated by the increasing difficulty in securing loans. The survey found that 29% of lower-income households faced loan rejections, a noticeable increase from 24% in May.
Rachelle Earwaker, a Senior Economist at the Joseph Rowntree Foundation, emphasized the severity of the issue. Low-income mortgage borrowers are now paying approximately £300 more per month on their mortgages than they were a year ago. The rising cost of money has not only made it harder for these families to access credit but has also left them vulnerable to unregulated lenders and loan sharks.
The Uneven Impact of Higher Rates
While the Bank of England has paused its rate increases, the full impact of these higher rates is yet to be felt by many families. Only 60% of households with a mortgage have seen their rates rise so far. However, the Resolution Foundation warns that in cash terms, the burden of high rates will disproportionately affect those at the lower end of the income spectrum.
Their findings suggest that among the poorest 40% of households, those moving to a new fixed-rate mortgage deal next year will spend an additional 8% of their post-tax income on repayments. This figure is double the portion for the richest 40% of households, highlighting a worrying disparity in the financial impact of these economic changes.