Low-income borrowers hit hardest by Bank of England rate rises

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More than half of low-income UK households with mortgages have fallen behind on one or more of their bills, highlighting the combined pressure of rising interest rates and rapid inflation on their finances, new research has shown. 

A survey from the Joseph Rowntree Foundation charity showed a sharp increase in the share of less well-off mortgage holders who are in arrears on one or more of their household bills in October, with 58 per cent reporting difficulties, up from 49 per cent a year earlier. 

More than half of those who were struggling found themselves in arrears with four or more household bills. 

The findings, shared with the Financial Times, reflect the impact of 14 consecutive Bank of England interest rate increases that have left its target rate at 5.25 per cent — the highest since the financial crash. The rate rises have come alongside surging consumer prices which have outpaced household earnings growth.

While official figures showed a sharp decline in inflation in October, analysts expect the legacy of two years of rapid price gains to hang heavily on the economy and especially poorer families. 

Less well-off mortgage holders are now more likely to be in arrears with household bills or credit commitments than private renters, according to the research. It is based on a UK-wide online survey by Savanta of 4,053 respondents in the bottom 40 per cent of household incomes conducted between 12 and 31 October. 

Some 76 per cent of those with a home loan reported going without essentials such as food, energy and warm clothing as they struggled with the rising cost of living.

A growing portion of lower-income households have also been turned down for a loan, with 29 per cent reporting a rejection, up from 24 per cent in May, the survey found. 

Rachelle Earwaker, Senior Economist at JRF, said higher interest rates meant that low-income mortgage borrowers reported paying on average £300 more a month on their mortgages than a year earlier. 

“The cost of money crisis means that more families on low incomes can’t access credit and are being turned down for loans,” she said. “Removing this lifeline leaves struggling households at the mercy of loan sharks and other unregulated lenders.” 

While the Bank has put rates on hold, the impact of higher rates is yet to be felt by many families, with only three out of five households with a mortgage seeing their rates rise thus far, according to separate findings from the Resolution Foundation.

In cash terms the impact of the current high level of rates will fall heavily on households in the top income brackets because they tend to have larger mortgages. But homeowners towards the bottom of the income distribution are set to see the bigger hit to living standards.

The Resolution Foundation think-tank estimates that among the poorest 40 per cent of households, those moving on to a new fixed-rate deal next year will spend an extra 8 per cent of post-tax income on mortgage repayments, twice the portion for the richest 40 per cent of households.