'Really bad trouble’: Economists’ warning over mortgage repayments amid cost-of-living crisis

File photo dated 02/09/08 of a couple standing outside an estate agent's window. The number of people taking their first step on to the property ladder with a mortgage last year is estimated to have topped 400,000 for the first time since 2006. Issue date: Tuesday January 4, 2022.
MPs have been warned new borrowers could be in "really bad trouble" amid gloomy fiscal forecasts. (PA)

A senior economist and academic has warned MPs of a looming crisis in mortgage repayments as interest rates head upwards.

On Thursday, the Bank of England (BoE) announced they were increasing interest rates to 1% in attempt to quell sharply rising inflation after the consumer price index rose to 7%, its highest in 30 years.

The Bank is predicting inflation will continue to surge to more than 10% this year, with energy bills set to to go up again in the autumn.

Interest rates have been at a record low for a number of years, with house buyers able to borrow at the lowest rates seen for decades.

However, rising interest rates are already pushing up the costs of mortgages, meaning those not on fixed rates are seeing their monthly payments increase.

Read more: Cost of living: 1.5 million UK households face bills they can't afford

Speaking to a Treasury committee meeting in parliament, Charles Goodhart, emeritus professor of banking and finance at the London School of Economics, told MPs some homeowners will be in "really bad trouble" as interest rates increase.

“Remember that housing prices have been rising dramatically fast over the last few years… so it’s only recent borrowers who I think going to be really in bad trouble," said the professor.

Recent borrowers could fall into difficulty if the value of their homes go down but their monthly mortgage payments rocket when their fixed-rate repayments come to an end.

A shopper looks at salad vegetables in a branch of Waitrose in south London. Shoppers are said to be buying a raft of Christmas items, such as presents and frozen turkeys, early in a bid to make sure their festive celebrations are not heavily disrupted for a second year. Picture date: Friday October 15, 2021.
The Bank of England on Thursday warned they expect inflation to pass 10%. (PA)

"I think that people who have borrowed at very low rates and find the house prices have been shooting up are not going to be in desperate straights — it’s the new borrowers that I’m particularly worried about.”

House prices soared 11% year on year in February. However, experts have warned a slowing is on the horizon.

“The headwinds facing the wider economy cannot be ignored," said Russell Galley, Halifax’s managing director earlier this month.

"The house price to income ratio is already at its highest ever level, and with interest rates on the rise and inflation further squeezing household budgets, it remains likely that the rate of house price growth will slow by the end of this year.”

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Goodhart told MPs that the BoE should tighten up rules to ensure "only really strong borrowers" are able to enter the market.

“I would very much hope that the regulatory authorities in the Bank of England start tightening up on the constraints on new borrowers, who have to take out very large loans and then find that the value of the house suddenly — after they’ve bought it — starts going down." he said.

File photo dated 3/2/2022 of Bank of England boss Andrew Bailey who has called on banks to use restraint on bonuses to help keep inflation down as he warned the
Bank of England governor Andrew Bailey warned the Bank's decision to increase interest rates will hit low income households hardest. (PA)

His intervention comes after BoE governor, Andrew Bailey, said the Bank's decision to increase interest rates would hit poorest households the most.

“I recognise the hardship this will cause for many people in the UK, particularly those on the lowest incomes, often with little or no savings, who are hit hardest by increases in the prices of basic necessities like food and energy,” Bailey said on Thursday.

And while the Bank conceded they had to change their previous inflation predictions due to geopolitical issues like the war in Ukraine, it expects inflation to drop next year to around 2% over the next two years.

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Last week, the Treasury said the country is "not alone" in the fiscal challenges in the aftermath of the interest rate increase and said they are taking steps to address the situation - but claimed "can't shield everyone entirely".

However, shadow chancellor Rachel Reeves accused the government of "shrugging their shoulders" on the rising cost of living.

The Resolution Foundation warned the Bank's projections reveal that the average British household is facing a £1,200 loss in income in 2022.

Watch: Bank of England predicts cost-of-living 'hardship'