EMBARGO: Immediate Release

Mortgage hit to economy bigger than a 2p income tax hike

• Economy facing £15 billion hit from soaring mortgages, higher than a 2p hike in income tax

• Individual households to face £3,600 rise in mortgage payments, equivalent to a 6p income tax hike 

The hit to the economy from soaring mortgage rates will be equivalent to a 2p income tax hike, new analysis by the LiberalDemocrats has revealed.

The figures show that annual mortgage repayments are expected to be around £15 billion higher in December 2024, compared to the start of the cost-of-living crisis at the end of 2021. This is more than the £13.7 billion 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 on mortgage repayments, combined with official HMRC figures on the expected impact of tax changes.

For individual households with a mortgage, the impact of soaring mortgage rates is even more stark. 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 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.”

ENDS

Notes to Editor

Reported here in The Telegraph.

Full analysis is available here.

Economy-wide hit

According to the Resolution Foundation, aggregate mortgage repayments at the end of 2023 (Q4) will be around £10bn higher than their level at the end of 2021. That figure rises to around £15bn at the end of 2024 [Resolution Foundation, 17 June 2023, The Mortgage Crunch, p.4, Figure 3]

According to HMRC’s direct effects of illustrative tax changes, a 2p rise in the basic rate of income tax would raise £11.2bn in 2023 and £13.7bn in 2024. This suggests that the scale of aggregate mortgage payments in 2024 will be higher than the equivalent effect of a 2p rise in basic rate income tax. In 2023, aggregate mortgage repayments will be equivalent to a rise of roughly 1.8p in the basic rate.

Example household 1:

A household made up of two basic-rate taxpayers, each earning £50,270 currently pays £15,080 in basic rate income tax, levied at 20%. After a 2p rise in the basic rate (22%) they’d pay a combined £16,588. That’s an extra £126 a month.

Their outstanding mortgage is £110,000. If they’d taken out a 2-year fixed rate deal on the eve of the mini budget (at the then average rate of 4.24%) their monthly repayments would have been £595. But at the current average rate (6.19%), their monthly repayments will be £722, £126 higher - equivalent to a 2p rise in income tax.

Example household 2:

A household made up of one higher rate taxpayer and one basic rate taxpayer earning £35,000, currently pays £12,026 in basic rate income tax, levied at 20%. After a 6p rise in the basic rate (26%) they’d pay a combined £15,634. That’s an extra £301 a month.

Their outstanding mortgage is £145,000 (in line with the typical outstanding loan). They’re coming out of a 2-year fixed-rate deal taken out in 2021, with a then typical rate of 2.34%, and monthly repayments of £650. If they take out a new 2-year fixed rate deal at the current average rate of 6.19%, their monthly repayments will be £951. That’s an extra £301 a month, equivalent to a 6p rise in their basic rate income tax.