Rishi Sunak warned of ‘serious shock’ for mortgage holders as Bank of England poised to raise interest rates

Rishi Sunak has been warned homeowners face a “serious shock” as the Bank of England prepares to hike interest rates for the 13th time in a row, piling more pressure on struggling mortgage holders.

The Institute of Fiscal Studies (IFS) said 1.4m homeowners will see a fifth of their disposable income wiped out by soaring mortgage rates, while Trade body UK Finance said it expects 98,500 borrowers to fall behind on payments this year.

The central bank is on Thursday expected to increase the so-called base rate from 4.5 per cent to at least 4.75 per cent – and possibly as high as 5 per cent.

It comes after a shock inflation reading on Wednesday showed the rate at which prices are rising flatlined in May at 8.7 per cent, instead of an expected fall.

The predicted interest rate change – aimed at bringing spiralling inflation under control – will add further pressure to the bank accounts of millions of homeowners through higher monthly mortgage payments.

The average rate on a two-year deal has already shot up to 6.15 per cent, Moneyfacts figures on Wednesday showed – almost triple the level seen last March.

The influential think tank, the IFS, has warned that the average mortgage holder will be £3,360 worse off a year, or £280 a month, because of the increases, wiping out around a tenth of their disposable income.

The IFS said around 1.4m of the 8.5m mortgage holders in the UK – half of whom are under 40 – will lose a fifth of their disposable income because of higher mortgage costs.

Research economist Tom Wernham said many people bought homes when interest rates were low and were now “exposed” to the higher payments.

“For many, the increase in monthly repayments is going to come as a serious shock,” Mr Wernham said.

He added: “Given the cost of living pressures people are already facing due to high food and energy price inflation, these significant increases in mortgage costs could not come at a worse time.”

Trade body UK Finance predicts 98,500 borrowers will fall behind on payments this year, rising to 110,300 in 2024 – the highest level since 2014.

And it forecasts the number of repossessions will hit 7,300 this year, climbing next year to 9,700.

The unfolding mortgage crisis has led to calls for the government to intervene, including from backbench Tory MPs.

Right-wingers Jonathan Gullis and Sir Jake Berry both called for the return of a Thatcher-era tax break offering relief on mortgage interest.

And the Liberal Democrats called for a £3bn fund to protect those struggling with payments, paid for by reversing tax cuts on banks.

But the government has ruled out providing support, insisting that to do so would prolong inflation and defeat the purpose of interest rate hikes.

Former Bank of England rate-setter Andrew Sentance told The Independent there is “great danger” in thinking the government will “step in to solve all known problems”.

He added: “There has been a bit too much shock horror about the fact that interest rates have moved up to where they are now. That had to happen at some point. Perhaps people who are taking out mortgages should have thought that was a possibility.”

Xural.com