Middle-aged, middle-income households facing economic hit, expert warns

A top economist has warned “middle-income, middle-aged people” are likely to face a significant hit to their incomes due to rising interest rates.

Paul Johnson, director of the Institute for Fiscal Studies, told the Treasury select committee that surging interest rates are making “anyone with mortgages worse off” as people are forced to move onto higher rates.

The Bank of England (BoE) is expected to increase interest rates by a significant margin in November in a bid to control inflation and calm market turmoil following chancellor Kwasi Kwarteng’s mini-budget.

The rising interest rates will come as millions are due to remortgage before the end of 2023, meaning they will incur higher charges.

Watch: Keir Starmer asks 'Who voted for this?' in PMQs amid economic crisis

Mortgage rates are already surging since Kwarteng's announcement, which included more than £40bn in unfunded tax cuts.

Rates on two and five-fixed-year deals have gone past 6% for the first time in many years due to the market turmoil, while lenders have also been pulling hundreds of products.

Johnson told MPs on Wednesday: "[Rising interest rates] will clearly make anyone with mortgages worse off, that might be middle-income middle-aged people.

Read more: Bank of England warns UK households may face 2008 financial crisis mortgage strain

“There's obviously a direct effect there. And people who have bought more recently are going to be more affected because they tend to have bigger outstanding debts.

“Actually, anyone who's a homeowner will be affected in some sense because their wealth likely goes down."

The BoE warned the proportion of households struggling to make their mortgage payments is expected to increase to its pre-financial crisis peak by the end of next year.

The Bank’s Financial Policy Committee (FPC) said households with high cost of living-adjusted mortgage debt-servicing ratios would soar if interest rates increase in line with what the market expects.

Read more: UK economy shrinks in August as recession fears mount

At prime minster's questions on Wednesday, Labour leader Sir Keir Starmer said Liz Truss needed to “stop ducking responsibility” and reverse the “kamikaze budget”.

He told the PM: "The Tories went on a borrowing spree, sending mortgage rates through the roof. They are skyrocketing by £500 a month.

“For nearly two million homeowners their fixed-rate deals are coming to an end next year. They’re worried sick, and everybody in this House knows it. They won’t forgive.

SNP Westminster leader Ian Blackford accused Truss of “scapegoating” the governor of the BoE in order to save Kwarteng from the impact of the mini-budget.

Speaking on Monday on ITV’s Good Morning Britain, consumer champion Martin Lewis, who was answering viewers’ questions, called for the creation of a “mortgage emergency plan”.

He said: “If you’re watching regulator, BoE, government, you need a mortgage emergency plan now, or there’s a ticking time-bomb, that’s my opinion.”

As well as facing rising costs, rising mortgage rates could also make it harder for borrowers to pass lenders’ affordability checks, narrowing the options available to them.

Last week, Moneyfacts calculated that, based on Thursday’s rates, someone with a £200,000 mortgage paying it back over 25 years could end up paying around £5,000 per year more for a two-year fixed-rate deal than they would have last December.