Think-tank says higher interest rates have given boost to household incomes
Resolution Foundation says older asset-rich households have gained the most while younger, mortgaged households have been hit hard.
The boost to UK savers’ incomes from higher interest rates outstripped the impact of increased mortgage payments on households, latest research from the Resolution Foundation think-tank reveals.
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 increased from 0.1 to 5.25%, on household balance sheets and incomes.
HIT HARD
The Resolution Foundation says that the boost 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 think-tank 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 boost 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 Bank 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 rising by £34 billion – more than offsetting the £18 billion rise in debt interest costs to give a net interest income boom of £16 billion.
INTEREST PAYMENTS
Simon Pittaway, Senior Economist at the Resolution Foundation, says: “When interest rates rose in the 80s, 90s and 2000s, household incomes tended to fall directly, with interest payments on debt rising by more than extra income from savings.
“But changes to the UK mortgage market and enforced saving during the pandemic have meant that the Bank’s latest rate-raising cycle has actually boosted household incomes by £16 billion.”
He adds: “The impact of the unlikely income boost has been very uneven – older, asset-rich households have gained the most, while younger mortgagor households have been hit hard.
“And while rising rates have boosted incomes over the past two years, they are likely to reduce them in the year ahead – presenting a fresh living standards challenge in an election year.”
