Higher mortgage interest rates since 2022 have put pressure on disposable income and “pushed 320,000 people into poverty”, a report from an economic research institute has found.
The Institute for Fiscal Studies’ (IFS’) report, Living standards, poverty and inequality in the UK: 2024, stated that official data did not measure mortgage interest payments properly, so only counted around 230,000 as being affected by elevated housing costs.
It found that official statistics did not measure mortgage interest payments directly, but instead modelled household payments on average rates, which overlooked “the significant and growing variation in rates between households”.
It stated that by December 2023, the measurement of the impact of mortgage interest payments missed 70,000 people who were struggling financially, and this was set to increase to 150,000 as more fixed rates ended.
It found evidence that mortgage rate rises had pushed some adults into “financial hardship”.
It stated that the majority of mortgaged households had been mismeasured by at least £500 per year due to interest rate assumptions.
In 2022-23, the average mortgage rate was around 2.3%, equating to interest payments of £240 per month for a household on a typical outstanding mortgage. However, a tenth of households were on an interest rate of at least 4.7%, equivalent to £490 per month.
According to the report, adults remortgaging in 2022 were 2% more likely to fall into arrears on bills than those who had not.
Sam Ray-Chaudhuri, a research economist at IFS and an author of the report, said: “Rising mortgage rates have played and are likely to continue to play an important role in many households’ living standards. But, perhaps surprisingly, they are not measured properly in the official income data.
“This has led to the headline statistics understating the number of people in poverty, something set to get worse in next year’s data.”
He added: “Poverty rises have also been understated due to the unequal impact of inflation. At a time when rates of deprivation and food insecurity have risen substantially, poverty statistics that hide the real scale of these increases [the] risk [of] policymakers missing what is truly happening to poverty.”
Re-assessing the mortgage sector
Arjan Verbeek, CEO of long-term fixed rate mortgage lender Perenna, said the data should cause a rethink of how the mortgage market operated.
He said: “At some point, we need to step back and reassess how our mortgage market works. As hundreds of thousands have been pushed into poverty by higher mortgage rates, the time is now.
“There is a profound societal impact of our short-term, volatile mortgage market that is extremely harmful to those with no flex in their monthly budgets. Hard-working families deserve to own their homes and have a financially stable roof over their heads. Once they achieve this goal, they have a right to keep it and not fall into poverty due to economic factors outside their control.
“Homeownership should be about stability, not gambling, so we need to find ways of protecting consumers from interest rate risk. This report is a shocking indictment of our mortgage market, so let’s start thinking outside the box for new solutions.”
Cost-of-living crisis impacted people differently
The report, which was funded by the Joseph Rowntree Foundation, looked at living standards since the pandemic and cost-of-living crisis.
It found that between 2021-22 and 2022-23, median household income before housing costs declined by 0.5%. This meant median income in 2022-23 was 1.6% lower than in 2019-20 overall, which was equivalent to a fall of 0.6% each year. The report stated this was similar to the rate of change seen after the global financial crisis.
Peter Matejic, chief analyst at Joseph Rowntree Foundation, added: “This research shows the cost-of-living crisis wasn’t felt equally by everyone. Compared with before the Covid-19 pandemic, many more people, especially those on a lower income, struggled to heat their homes or keep up with their bills.
“One reason lower-income households went without essentials is because they faced a rate of inflation even higher than the headline numbers. High interest rates also saw many households forced into financial hardship after they remortgaged.”
He added: “This report raises many questions about whether social security is adequate for the challenges looming over struggling households. The new Government can’t wait for growth, after years of cuts, caps and freezes to social security have left families without the financial resilience and security they needed to cope with higher prices and costs.”
This article was first published on Your Mortgage‘s sister site, Mortgage Solutions. Read: Mortgage rate rises pushed 320,000 people ‘into poverty’, says IFS
