Cost of living: Mortgage-holders face 'biggest falls in income'

·3-min read
BATH, UNITED KINGDOM - FEBRUARY 05: Aerial view of early morning mist lingers above streets of residential houses that are seen from the air, on February 05, 2023 in Bath, England. According to a report from the Royal Institution of Chartered Surveyors (RICS) soaring interest rates and falling prices will mark the end of the UK’s 13-year housing market boom potentially leading to a house price crash. Adding to these woes is the fact that the UK is also currently facing a cost of living crisis, as inflation hits a near-30-year high, the war in Ukraine puts pressure on food prices and rising energy bills squeeze household incomes still further. (Photo by Matt Cardy/Getty Images)
Homeowners with mortgages could be the worst hit financially in the next two years, an economist said. Getty Images)

People with mortgages are set to face the biggest falls in income, an economist has said.

The Resolution Foundation think tank predicts that mortgagors - or homeowners with a mortgage - will see their income drop by 8% on average over the next two years because of rising interest rates.

This equates to an average drop in income of almost £3,000, the think tank said, as the cost of living crisis continues.

The warning comes a day after the Bank of England raised interest rates from 4% to 4.25% following an unexpected jump in inflation - the rate at which the prices of goods changed - which rose from 10.1% in January to 10.4% in February.

Watch: Bank of England raises interest rates again

The bank has been raising interest rates for about 15 months, with Thursday’s decision the 11th time in a row that the rate has increased.

On Friday, Torsten Bell, the chief executive of the Resolution Foundation, said in a blog post headlined: A Living Standards Maelstrom For Mortgagors': "There’s another phase ahead of us, in which rising interest rates are doing a lot of the work of crushing living standards.

"That will mean quite different outlooks for those in different housing tenures. The big news is that mortgagors – the highest income group – are set for the biggest income falls: 8%, or £2,900, on average over this year and next.

"That’s a big turnaround from the living standards windfalls of falling interest rates in the 2010s."

(Resolution Foundation)
Income for people with mortgages is forecast to dip. (Resolution Foundation)

The figures were compiled by the Resolution Foundation using data from the Office for National Statistics (ONS), the Department for Work and Pensions (DWP) and forecasts by the Office for Budget Responsibility (OBR).

In what it called a "surprise", the foundation predicted that renters' income would stay the same or even grow slightly over the same period.

Read more: How much do houses cost in Britain's 'best place to live'?

Bell said: "As we look ahead, the cost of living crisis is getting more complicated in its distribution, even if the big picture remains blindingly obvious: it’s a disaster for Britain."

Earlier this week, the Resolution Foundation has said UK workers are £11,000 worse off per year because of 15 years of wage stagnation.

It calculated that, had wages continued to grow at the pace seen before the 2008 financial crash, the average worker would make £11,000 more per year than they do now, taking rising prices into account.

The think tank also found typical UK household incomes have fallen further behind those in Germany - in 2008, the gap was more than £500 a year, now it is £4,000.

Painted period properties in Kelly Street NWI, in the north London borough of Camden, on 6th March 2023, in London, England. (Photo by Richard Baker / In pictures via Getty Images)
Homeowners with mortgages could see their income fall by 8% over the next two years, a think tank has warned. (Getty Images)

Last week, the OBR, the government's official forecaster, said the UK is on track to avoid a technical recession, or two consecutive quarters of decline.

However, it said people are still expected to face the biggest fall in living standards on record, with real households’ disposable income per person due to tumble 5.7% over 2022/23 and 2023/23.

On Wednesday, the ONS said annual house price growth has slowed but rental prices have increased at their fastest rate since records started in 2016.

Average UK house prices increased by 6.3% in the 12 months to January 2023, down from 9.3% in December 2022.

The average UK house price was £290,000 in January 2023, which was £17,000 higher than 12 months earlier.

But private rental prices paid by tenants in the UK increased by 4.7% in the 12 months to February 2023, according to the ONS.

This represented the largest annual percentage change since comparable UK records started in January 2016.

Watch: Bank of England boss 'more optimistic' of avoiding recession