Savers’ incomes surpass the impact of higher mortgage rates

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The Resolution Foundation says that the rise has not been felt evenly by households across the UK, with older asset-rich households having gained the most, while younger mortgager households have been hit hard

The boost to UK savers’ incomes from higher interest rates outstripped the impact of higher mortgage payments on households, according to the latest research from the Resolution Foundation.

Its latest Macroeconomic Policy Outlook looks at the impact of the Bank of England’s recent rate-rising cycle between December 2021 and August 2023, when interest rates rose from 0.1 to 5.25%, on household balance sheets and incomes.

The think-tank says that the rise has not been felt evenly by households across the UK, with older asset-rich households having gained the most, while younger mortgager households have been hit hard.

The Resolution Foundation reckons rates changes to the UK mortgage market and improving household balance sheets, including ‘forced saving’ during the pandemic, helped to deliver an £16 billion household income hike from higher interest rates.

Over the period fixed-rate deals replaced variable rate deals with 5-year fixes replacing 2-year fixes as the most popular mortgage product. This slowed the pass-through from interest rate rises to mortgage costs, with nearly two-in-five (37%) households that had a mortgage when the BoE started rising rates in 2021 yet to see their fixed-rate deal come to an end.

On the flip side, the income boost from higher savings interest has been more immediate – with real income from savings increasing by £34 billion – more than offsetting the £18 billion increase in debt interest costs to give a net interest income boom of £16 billion.

Simon Pittaway, Senior Economist at the Resolution Foundation, comments: When interest rates increased in the 80s, 90s and 2000s, household incomes tended to drop directly, with interest payments on debt increasing by more than extra income from savings.

He said: But changes to the UK mortgage market and enforced saving during the pandemic have meant that the BoE’s latest rate-hiking cycle has actually raised household incomes by £16 billion.

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