Cost of Living: Mortgage rates surge 27% as cheap deals scrapped

Mortgage repayments have increased by 27% on average for borrowers whose contracts expired between September and February.

The last of the ultra-low borrowing rates is expected to cost the economy £24 billion this year.

According to mortgage broker London Money, which examined nearly 200 clients whose old fixed-rate deals had expired, the average monthly repayments on a loan of around £325,000 have increased by £317.50 per month.

The new data is the first indication of how a rapid rise in interest rates, which began in December 2021, has affected borrowers who have been used to mortgage rates of one to two percent for the past ten years.

The Office for Budget Responsibility (OBR) announced last week that interest rates, which are currently around 4%, are expected to peak at 4.2% by the end of 2027 as borrowers exit their old, low-cost fixed deals.

Capital Economics predicts that by the end of this year, households will have to spend £65 billion on mortgage interest, up from £41 billion.

While the OBR predicts a 5.7% drop in living standards over the next two years, this is the largest two-year drop since records began in 1956.

Martin Stewart, the founder of London Money, told The Times: “This is money that won’t be going into your local bakery or the economy, it’s going to be sitting on a bank’s balance sheet and it’s billions of pounds that won’t be going on discretionary spending.

Stewart explained that in order to deal with higher mortgage rates, clients were making all or part of their mortgages interest-only and extending the terms of their loans.

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“In London I think people will be able to absorb it more because of higher incomes, but outside the shires this is really going to hurt.”

According to data from the consultancy CACI provided by the bank First Direct, approximately £236.8 billion in mortgage deals will expire this year.

When their mortgages expire this year, 1.7 million homeowners will face higher payments.

The rate of inflation will fall from 10.1% in January to 2.9% by the end of the year.