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UK homeowners face £19bn rise in mortgage costs as fixed-rate deals expire

Homeowners are facing a £19bn increase in mortgage costs as millions more fixed-rate deals expire and borrowers are forced to renegotiate their home loans after the toughest round of interest rate increases in decades.

Despite an escalating price war between lenders cutting the cost of remortgaging in recent days, economists at the US investment bank Goldman Sachs said many UK households would still experience a dramatic leap in repayments compared with the deals they were leaving behind.

In what has been described as a Tory mortgage timebomb by Rishi Sunak’s critics, up to 1.5m households are expected to reach the end of cheaper deals in 2024 – with an increase in annual housing costs of about £1,800 for the typical family, according to the Resolution Foundation thinktank.

As fixed-rate deals expire and households absorb the biggest hit to their finances in the postwar age, with inflation and tax rises taking their toll on spending power, borrowers are turning to a range of measures to cope with the increased costs, from renting out rooms in their homes to drawing down pensions early and even postponing having children.

Mortgage payments chart

With the government under pressure before a general election expected in the second half of the year, the Liberal Democrats warned 2024 was set to be the “year of the squeezed middle”.

Publishing research suggesting the typical household would face a hit of more than £4,700 from higher mortgages, taxes and energy bills combined, Sarah Olney, the party’s treasury spokesperson, said: “People are worried sick about paying the bills and having to make big cut backs just to get by.”

Ministers will attempt to claim on Saturday the government is easing the burden on households by rushing through a £10bn cut in national insurance. The cut will do little to offset a much larger six-year freeze on income tax thresholds, however, with tax as a share of the economy set to hit the highest level since the second world war.

Pressure should begin to ease in the spring, with the Bank of England widely expected to cut interest rates to below 4% by the end of the year from the current level of 5.25%.

The expectation of a round of rate cuts is triggering a bidding war among lenders to improve their mortgage offers. HSBC, Halifax and TSB have updated their fixed-rate deals, and the average rate on a two-year fixed home loan has this week fallen to its lowest level for nearly seven months.

Moneyfacts, the financial information service, said on Thursday the average rate on a two-year fixed deal had fallen from 5.92% to 5.87% in a day.

However, borrowing costs remain more than double the level two years ago, adding to pressure on households struggling with their energy bills and rising taxes amid the cost of living crisis.

Alice Haine, a personal finance analyst at the investment platform Bestinvest, said: “The mortgage market may be heating up with rate cuts dominating the news, but this won’t fully ease the pain for the roughly 1.6 million existing borrowers with cheap fixed-rate deals expiring this year.

“They still face a heavy jump in interest payments when they switch onto a new product, with the only comfort that the situation could have been much worse.”

About 55% of UK mortgages have been moved on to a higher interest rate since borrowing costs started to rise from a record low of 0.1% in December 2021, and a further 5m mortgages are expected to be repriced by 2026.

Mortgage rates graphic

Torsten Bell, the chief executive of the Resolution Foundation, said: “Bear this is mind when you read news stories saying ‘homeowners will benefit from a fall in mortgage rates’ – what they mean is that the increase in people’s mortgage bills won’t be as painful as they would otherwise have been.

“I’d gently suggest they won’t feel like they are ‘benefiting’ as their mortgage bill rises by hundreds of pounds a month.”

In forecasts suggesting the peak impact on households would come by the summer, Goldman Sachs said it expected the Bank to begin cutting its base rate from as early as May. It said sticking at higher levels could add £30bn to mortgage repayments by the end of next year, but that a figure of £19bn was more likely if the Bank followed through with expectations.

The Bank’s most senior policymakers pushed back against financial market expectations as recently as last month. After leaving borrowing costs on hold in December, Andrew Bailey, the Bank’s governor, said it was “really too early to start speculating” about rate cuts.

The prospect of a pricing war softening the cost of remortgaging is likely to be seized upon by the government, as the Conservatives battle to overturn a commanding Labour lead in the polls before the general election.

Highlighting easing pressure in the mortgage market, figures from the Bank on Thursday showed the number of new home loan approvals rose for a second month in a row in November to 50,100, up from 47,900 in October.

A Treasury spokesperson said the UK economy was “turning a corner” after inflation had been halved. “We are also supporting households worth £3,700 between 2022 and 2025, and our mortgage charter can make it easier for people to manage monthly repayments and gives extra protections against repossessions.”