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Rising mortgage rates: A debt advice perspective

Grace Brownfield reflects on our CEO Joanna Elson's appearance before the Treasury Committee

Grace Brownfield

Senior Influencing Manager at Money Advice Trust

Posted November 10, 2022

Last week saw the Bank of England raise interest rates to 3%, the highest level in three decades, as part of its efforts to tackle high inflation.

The rise comes after a turbulent few weeks for the mortgage market, which saw rates jump from an average of 4.75% before the Government’s ‘mini-budget’ to a high of around 6.5%.

For people on tracker or variable rate mortgages, and those coming to the end of their fixed rate mortgage contracts, this means facing higher monthly repayments at the same time as costs are rising across the board. For mortgage holders on low incomes, who have already seen their household budgets stretched to the limit, these increased costs couldn’t come at a worse time.

With rising housing costs high on the agenda, our Chief Executive, Joanna Elson, gave evidence to the Treasury Committee in Parliament last week - sharing what we are seeing in our services. Joanna appeared in front of the Committee a few days before the Bank of England raised interest rates again.

Joanna was joined by senior leaders from UK Finance, Nationwide, and mortgage brokers John Charcol for a one-off session focused on the mortgage market, how people are coping and what sort of help may be needed from the government and lenders. Here we share some key takeaways from the session and discuss what needs to happen to protect both mortgage holders and renters in financial difficulty.

Worries are rising...

It’s a worrying time for many mortgage payers, and Joanna shared what we have been seeing at our frontline debt advice services. Having been used to ultra-low interest rates for a long time, higher interest rates are a shock for many people’s finances. Our recent research found 22% of UK adults are worried about the cost of their mortgage given rising interest rates.

The wider cost of living crisis means higher mortgage payments are proving difficult to deal with alongside increases in energy, food and other bills. As Joanna described it in the session, we’re seeing a “perfect storm” for people with mortgages who are already struggling with rising costs.

...but the full impact is yet to be seen

More people are coming to debt advice charities with worries about their mortgage – but we’re not yet seeing an increase in arrears.  Relatively speaking, we’re still just at the start of this period of high rates. Arrears take time to build-up, and we know it can take a while for people to seek advice when they’re experiencing financial difficulty. But it’s clear people are worried. People on variable rates will already have seen their rates rise, and by the end of 2023, around 1.8 million people are due to come off fixed term deals, facing much higher monthly payments. And renters – who make up 69% of callers to National Debtline – are worried about landlords putting up their rents to cover higher costs.

Some more impacted than others

Of course, not everyone will struggle with higher payments, and many may be able to absorb the extra costs in their budget. However, for others, finding hundreds of pounds extra a month in mortgage payments, when their household budgets are already stretched, is going to be a real struggle.

Research by the FCA shows a quarter (25%) of mortgage holders have a household income of under £30,000. And our own research found that, while 5% of UK adults said they were currently behind on mortgage payments, this rose to 7% for people from an ethnic minority background, 10% for people receiving a means-tested benefit and 11% for people aged 18-34 years old.

Essentially, what we’re seeing is that groups who were already financially disadvantaged are the ones feeling the worst impacts of the rising cost of living, something both lenders and policy makers need to be alive to.

Action is needed now

While average interest rates for fixed-rate mortgages have dropped slightly in recent weeks, this challenge isn’t going away any time soon – as evidenced by the Bank of England’s base rate rise. So how can we help people facing worries about affording their mortgage costs?

  1. We need to see lenders being pro-active in supporting people worried about their mortgage payments – and early intervention is crucial.  Lenders largely got this right during Covid – they need to apply that approach to this new crisis. Promoting the support available, being clear in their communications with customers, and offering appropriate forbearance are all steps that they can take.
  2. The Government needs to reform Support for Mortgage Interest (SMI), so it gets to the people who need it.  Currently, you have to wait 39 weeks before getting support through this scheme – this needs to be reduced back down to 13 weeks.  As Joanna highlighted last week, 39 weeks is just too long to wait when you are struggling with repayments, plus you can’t currently receive help if you have any income from work, which excludes far too many people. In June 2022, when Rishi Sunak was Chancellor, the Government committed to make such changes to SMI. However, these have not been forthcoming and the Prime Minister has not stated whether he still intends to make them. Bringing these changes forward as a priority is vital.
  3. The Government need to introduce their package of protections for private renters as soon as possible, as renters will also be hit by rising rates. And of course, it’s imperative that the Government uprate benefits by inflation to avoid a real-terms cut to incomes.

We have a crucial opportunity to act now, to reduce the worst effects of rising rates on mortgage holders and renters. We will continue working with Government and creditors to push for urgent action to help people experiencing the double whammy of high costs and high interest rates, and ensure those most vulnerable to these impacts are not the most disproportionately impacted.

View our Chief Exec Joanna Elson’s contribution on Support for Mortgage Interest reform, and our latest press release on the impact of the Bank of England’s interest rate rises.

Grace Brownfield

Senior Influencing Manager at Money Advice Trust

Grace is the Money Advice Trust’s Senior Influencing Manager. She previously worked in the policy team at StepChange Debt Charity. Before that she worked on issues related to the financial impact of cancer at Macmillan Cancer Support and NSPCC. View all posts from Grace Brownfield.

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