Households batten down the hatches as higher mortgage costs loom

Households are saving more and spending less as they hunker down ahead of an expected steep rise in mortgage costs when their fixed-rate deals end, the Bank of England has warned.

The news will revive fears that the home loans timebomb that exploded in the aftermath of the Liz Truss mini-Budget and sent borrowing costs soaring has not been extinguished.

The Office for National Statistics (ONS) estimates that households have accumulated between £143 billion and £338 billion in excess savings since the start of the pandemic.

It comes as interest rates are set to stay higher for longer after Chancellor Rachel Reeves’s tax-and-spend Budget last month unsettled financial markets.

In a sobering assessment, the Bank reckons that 2.4 million homeowners paying less than 3 per cent interest on their mortgages face higher repayments over the next three years as they come off cheaper rates.

Most people who take out a mortgage pay a set amount each month for a number of years – regardless of what happens to interest rates in the meantime.

About two-thirds of outstanding home loans are fixed for five years, the Bank estimates, with many of them taken out before it began raising rates from almost zero in 2021 to combat runaway inflation.

It means that homeowners with a £250,000 mortgage whose five-year fixed-rate deal ends in 2026 will pay £3,000 a year more as their repayments rise from £1,139 to £1,389 a month, according to the Moneyfacts website.

Interest rates peaked at 5.25 per cent and are now down to 4.75 per cent after the Bank’s latest cut last week. But experts warn that mortgage costs could still rise despite the Bank’s move.

That is because rates in the swaps market – which determine the wholesale price lenders pay for fixed-rate mortgages – have been rising since details of the Chancellor’s Budget started to leak in September, sending Government borrowing costs higher.

The Office for Budget Responsibility, which checks Reeves’s plans, reckons average mortgage rates will rise from 3.7 per cent this year to 4.5 per cent in 2027 and stay at that level until the end of the decade.

The Bank of England sounded the alarm in its latest report on monetary policy, which said ‘some mortgage holders have reduced their spending in anticipation of paying higher rates’. It cited a survey where one in six households who saved more in the past year said ‘future housing costs’ were ‘a main factor’ in their decision.

Households facing higher mortgage costs cut spending by about 30 per cent of the anticipated rise in repayments, the Bank added.

That figure rose to 60 per cent among households already paying more for their mortgage.

Experts fear economic growth will slow if consumers continue to save more and spend less.