"Rising mortgage rates have played and are likely to continue to play an important role in many households’ living standards."
- Sam Ray-Chaudhuri, research economist at the IFS
Many households taking out a mortgage or remortgaging since 2022 have experienced sharp falls in their disposable income as higher interest rates have pushed up housing costs. By December 2023 this is set to have pushed 320,000 such people into poverty, according to a new report from the IFS.
The IFS noted that official data "do not measure mortgage interest payments properly", so official poverty statistics will only capture about two-thirds of this effect (230,000 people).
Despite the pandemic and the cost-of-living crisis, the overall rate of absolute poverty was the same in 2022–23 as in 2019–20 (18%, or 12.0 million people), though it did rise slightly by 0.8 percentage points (520,000) between 2021–22 and 2022–23. But there was a significant increase in more direct measures of hardship. For example, the proportion of working-age adults who reported being unable to keep their home warm enough rose from 4% to 11% (1.8 million to 4.6 million) between 2019–20 and 2022–23, and the share who reported being behind on bills rose from 5% to 6% (2.1 million to 2.5 million).
Part of the difference, the IFS says, is likely relating to how the official statistics measure incomes and hence poverty. Higher energy and food prices mean that lower-income households and pensioners faced a higher inflation rate than average – but this is not captured by the official poverty statistics. Taking account of higher inflation for these households implies poverty rose by 210,000 more people than implied by official statistics for 2021–22 and 2022–23 (730,000 people rather than 520,000), including 80,000 pensioners.
In addition, the official statistics do not measure households’ mortgage interest payments directly, instead modelling them based on average interest rates. This matters when there is a growing spread of interest rates as some households come off their fixed rate. The IFS estimates that in 2022–23, mismeasurement of mortgage interest payments resulted in the number in poverty being understated by 70,000 and, as more fixed-term mortgages end, that number is set to rise to 150,000 (based on December 2023 interest rates).
There is evidence that mortgage rate rises have pushed some adults into financial hardship. Adults remortgaging in 2022 were 2 percentage points more likely to fall into arrears on bills than those who had not remortgaged. This suggests that, once all households have remortgaged, the number of adults behind on bills could rise by 370,000.
Sam Ray-Chaudhuri, research economist at the IFS and an author of the report, said: "Rising mortgage rates have played and are likely to continue to play an important role in many households’ living standards. But, perhaps surprisingly, they are not measured properly in the official income data. This has led to the headline statistics understating the number of people in poverty, something set to get worse in next year’s data. Poverty rises have also been understated due to the unequal impact of inflation. At a time when rates of deprivation and food insecurity have risen substantially, poverty statistics that hide the real scale of these increases risk policymakers missing what is truly happening to poverty."
Peter Matejic, chief analyst at the Joseph Rowntree Foundation, which funded the report, added: "This research shows the cost-of-living crisis wasn’t felt equally by everyone. Compared with before the Covid pandemic, many more people, especially those on a lower income, struggled to heat their homes or keep up with their bills.
"One reason lower-income households went without essentials is because they faced a rate of inflation even higher than the headline numbers. High interest rates also saw many households forced into financial hardship after they remortgaged.
"This report raises many questions about whether social security is adequate for the challenges looming over struggling households. The new government can’t wait for growth, after years of cuts, caps and freezes to social security have left families without the financial resilience and security they needed to cope with higher prices and costs."
