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Taxpayers will have to earn thousands more to pay for mortgages

To fund the additional costs of a mortgage based on today’s two-year fixed interest rate of 6.07% a basic rate taxpayer will have to earn additional gross take home pay of £14,107.

It has been suggested that people should get a new higher paid job to mitigate increased bills. With these eye watering cost increases, for most people this is simply not plausible.

For most people, it would not even be possible to take on an extra part-time job (say over 3-4 evenings per week), to receive such levels of income.

Moreover, one should note that the above figures are best cases estimates of the additional gross income which one would need to earn simply to cover the additional mortgage and heating costs which many homeowners are now facing.

The figures do not consider the punitive marginal tax rates which can apply in some situations or child benefit clawback which can apply, where one partner is in receipt of child benefit and the other partner has an income of over £50,000 per annum. People caught by such ‘traps’ in the tax system could easily have to increase their income by at least £18,000 per annum or more – the exact number would depend upon the number of children involved, to simply cover the mortgage and heating cost rises.

Young homeowners would be disproportionately affected by interest rate increases. Maintaining inflationary increases of pensions will create greater disparity between generations, as the employed will not see such salary increases. The Government will need to address these disparities in the forthcoming Autumn Budget.

With such large increases in interest rates, the lending criteria for mortgages will tighten meaning that first time buyers will feel even more squeezed. The effect on the housing market from these changes will be pronounced.

Any tax changes announced by the Government are modest in relation to the huge increase in interest rates and Kwasi Kwarteng will be rightly worried about these significant structural changes on his economic plans.

The average 2-year fixed rate mortgage interest rate today is 6.07%. In December 2021 the rate was just 2.34%

The average house price in March 2022 was £297,254. Assuming a 75% interest-only mortgage, this would result in an increase in annual mortgage payments of £8,316.

In December 2021, the average energy price cap was £1,223, it is now £2,500 resulting in average energy prices increasing by £1,277.

In this situation the house owner would have to pay additional costs of £9,593, nearly £800 a month from net pay.

Would you like to know more?

If you would like to discuss the above and how it may impact you, please contact Robert Salter using the form below.

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