Millions teetering on the verge of financial collapse

There is increasing pressure on the British government to provide more assistance to struggling households, with the shadow finance minister warning of a “mortgage catastrophe” that could push millions to the brink of insolvency.

Last week, the BOE surprised many by raising interest rates by 50 basis points to 5%, marking the 13th consecutive rate hike and the highest level since 2008.

This unexpected move, aimed at reducing inflation, will impact millions of homeowners as their mortgage rates are directly tied to the central bank’s base rate. Renters are also likely to see their payments increase as buy-to-let landlords pass on higher mortgage costs.

According to the National Institute of Economic and Social Research, the BOE’s rate hike could result in 1.2 million households (4% of all households) running out of savings by the end of the year due to higher mortgage payments. This would raise the proportion of insolvent households to nearly 30%. The regions most affected would be Wales and the northeast of England.

“The increase in interest rates to 5% will push millions of households with mortgages to the brink of insolvency,” said Max Mosley, an economist at the NIESR. “Just as no lender would expect a household to withstand such a shock, the government shouldn’t either.”

On Friday, U.K. Finance Minister Jeremy Hunt held a meeting with major banks and building societies to discuss the deepening mortgage crisis in the country.

Hunt announced three measures agreed upon by the banks, mortgage lenders, and the Financial Conduct Authority. These include temporary changes to mortgage terms, the promise that consumers’ credit scores will not be affected by discussions with lenders, and a 12-month grace period for those at risk of losing their homes before repossession without consent takes place.

“These measures should provide reassurance to those who are concerned about high interest rates and offer support to those facing difficulties,” said Hunt.

“We will not waver in our determination because we understand that eliminating high inflation from our economy is the only way to alleviate the pressure on family finances and businesses,” he added.

Rachel Reeves, the shadow finance minister for the opposition Labour Party, criticized the government’s handling of the mortgage crisis, referring to it as “chaotic.”

“Unlike this government, Labour will not stand idly by as millions face a mortgage catastrophe caused by the Tories in Downing Street,” Reeves tweeted.

Shortly after the BOE’s rate hike, U.K. Prime Minister Rishi Sunak stated at The Times CEO summit that achieving the government’s goal of reducing inflation to 5% by the end of the year has become more challenging.

“I always knew it would be difficult, and it has certainly become tougher in recent months. However, it is crucial that we persevere,” said Sunak.

“The government will remain steadfast in its course and stick to its plan,” he added.

BOE Governor Andrew Bailey justified Thursday’s interest rate hike as a necessary measure to combat persistently high inflation.

Official figures released prior to the BOE meeting showed that annual inflation rose by 8.7% in May, surpassing expectations and keeping consumer prices well above the BOE’s 2% target.

“We understand that this is a difficult situation, and many people with mortgages or loans may be understandably worried about the implications,” said Bailey. “However, if we don’t raise rates now, the situation could worsen in the future.”

The Resolution Foundation, a think tank focusing on the challenges faced by low- and middle-income households, has cautioned that the difficulties for borrowers are far from over, despite the recent rate hike.

Their analysis suggests that households remortgaging in 2024 can expect an average annual increase of approximately £3,000 ($3,813) or more in their mortgage bills.

“There’s a lot of mortgage pain coming, and much of it will occur during the run-up to the 2024 election,” stated Torsten Bell, the chief executive of the Resolution Foundation.