UK Facing "Mortgage Crunch" as High Inflation and Interest Rate Hikes Squeeze Household Budgets

The government and the Bank of England (BoE) are under pressure to tackle prolonged high inflation, which has led to hikes in everyday prices, most notably for food.

The main tool available to the BoE to control this is interest rates.

Raising interest rates makes it more expensive for people to borrow money and encourages them to save, meaning overall they spend less, helping to cool prices and lower inflation.

However, this means loans, such as mortgages, become more expensive to take out.

The current bank rate stands at 4.5% after climbing 12 times in a row.

Some variable rate mortgages directly track this and automatically increase in line with it.

Borrowers can also end up on a standard variable rate when their initial mortgage deal ends.

The majority of fixed-rate mortgages were set at interest rates below 2%.

As the BoE base rate decision approaches, fixed mortgages have already been on an upward march, with some major lenders temporarily pausing applications and increasing their rates.

The average two-year deal was nudging 6% on Friday.

The Resolution Foundation think-tank expects the average two-year fixed-rate mortgage will not fall below 4.5% until the end of 2027.

If you are struggling with your mortgage payments, it is recommended to speak to your lender as early as possible to discuss options for keeping payments manageable.

This may include extending the mortgage term, temporary breaks from payments, or interest-only repayments.

If you are entitled to benefits such as universal credit, you may be eligible for the government's support for mortgage interest loan scheme.

Mortgage lenders are obligated to offer support to their customers, and speaking to them will not affect your credit rating.

It is important to weigh the options carefully before making a decision.

If you are coming to the end of a mortgage, a broker may be able to help you find a suitable deal.