Rising mortgage rates are worse than 2p tax hike

The hit to the economy from soaring mortgage rates will be equivalent to a 2p income tax hike, new analysis by the Liberal Democrats suggests.

The average mortgage rate for a two-year fix has surpassed 6% and the Bank of England has pushed the base rate to 5%, raising fears about extra cost pressures on households and borrowers.

Analysis by the Liberal Democrats suggests annual mortgage repayments are expected to be around £15bn higher in December 2024 compared with the start of the cost of living crisis at the end of 2021.

This is more than the £13.7bn tax hit that would result from a 2p increase in the basic rate of income tax.

The analysis is based on the latest research from the Resolution Foundation which estimates the average household will pay £3,000 more on mortgage repayments next year, combined with official HMRC figures on the expected impact of tax changes.

A typical household with an outstanding mortgage of £145,000 taken out in 2021 will be hit with a mortgage rise of around £3,600 a year, equivalent to a 6p hike in income tax, the research claims.

The Liberal Democrats are calling for a Mortgage Protection Fund, which would offer targeted support of up to £300 a month to those families facing the steepest rise in mortgage costs and facing losing their homes. This would be based on past schemes and be fully paid for by reversing Conservative tax cuts to big banks.

Liberal Democrat leader Ed Davey said: “This is a Conservative mortgage tax on millions of families. People are seeing their monthly mortgage payments go through the roof, all because the Conservatives lost control of inflation and the economy.

“While the banks need to step up and help, there isn’t a moment to lose for Rishi Sunak to guarantee help for homeowners facing repossession with a targeted Mortgage Rescue Fund. Every day that goes past means more families are at risk of losing their homes through no fault of their own.”