Millions of homeowners are facing a fresh mortgage squeeze as they come off cheap fixed-rate deals, with repayments potentially rising by up to £866 a month, according to analysis from retirement specialist Standard Life.
Rate Hold Offers Little Relief
The warning comes despite the Bank of England holding interest rates at 3.75% last week, a move that may offer some reassurance to borrowers. However, average five-year mortgage rates have climbed from 4.91% at the start of this year to 5.63%, adding around £213 a month to repayments on a £500,000 loan over 25 years.
Standard Life's analysis shows that borrowers moving from a 2.5% five-year fixed mortgage secured in 2021 onto today's average five-year fixed rate of 5.63% could see repayments jump by around £866 a month on the same sized loan.
Impact on Household Budgets
The figures underline the continuing fallout from higher borrowing costs, with many families still coming to the end of deals agreed before interest rates surged in response to inflation. Mike Ambery, Retirement Savings Director at Standard Life, said: "The Bank of England's decision to hold rates may provide some reassurance for borrowers, but with rates still expected to stay higher for longer, many homeowners refinancing this year are still facing a sharp jump in monthly repayments compared to the deals they've become used to."
He added: "For those coming off lower fixed-rate mortgages taken out before the recent rise in interest rates, the increase in costs can be significant. That's putting real pressure on household budgets at a time when many people are already contending with higher day-to-day expenses, and may lead them to reassess their wider finances."
Retirement Savings at Risk
Standard Life warns that the extra money being swallowed up by mortgage payments could dramatically reduce the amount households are able to save for retirement. Its analysis found that if an average first-time buyer redirected £866 a month into a pension rather than higher mortgage repayments over a 25-year period, they could build an additional £268,000 in retirement savings.
A worker starting on a salary of £25,000 and making minimum workplace pension contributions throughout their career is projected to build a retirement pot worth around £210,000 by age 68. However, adding £866 a month between the ages of 34 and 59 could increase that fund to around £478,000, according to the calculations.
Expert Warning on Pension Cuts
Ambery cautioned against cutting pension contributions to cope with rising housing costs. "If someone needs to adjust their finances, reducing pension contributions may feel like a quick way to free up income," he said. "However, stopping altogether can make it harder to stay on track for retirement."
The Bank of England has cut rates gradually from their post-inflation peak, but mortgage costs remain far above the levels many borrowers enjoyed during the era of ultra-low interest rates. Industry experts say hundreds of thousands of households are still due to refinance over the coming months, leaving many facing significantly higher monthly bills than those they have become accustomed to paying.
