Interactive Investor

Household spending soars by £9,161 since 2021

18th July 2023 10:00

Jemma Jackson from interactive investor

Heightened mortgage costs the biggest contributing factor, new interactive investor research finds.

The cost of essential household expenditure for homeowners has soared by £9,161 a year on average over the past two years – with higher mortgage rates the biggest contributing factor, according to new calculations by interactive investor.

This amounts to an increase of more than £763 a month on average, factoring in increases in mortgage, energy and food costs since 2021.

Mortgage interest rates have risen sharply in recent history after years of historic lows, following consecutive hikes to interest rates and shifting sentiment on how rates will go to tackle stubbornly high inflation.

The average rate for a two-year fixed rate mortgage deal stood at 6.75% at the time of writing – a 15-year high. Comparing this rate with the average mortgage rate as logged by the Bank of England of 2.29% two years ago in July 2021, interactive investor calculates that mortgage costs alone have gone up £7,975 per year on average over the period, based on the average house price on both dates and 30-year mortgage term.

When it comes to household energy bills, they have risen by £935 a year for the average household since 2021. This is despite the recent dip in energy bills from July, with the energy price cap falling to £2,074 a year, which is below the £2,500 a year level set by the government’s energy price guarantee. However, the existing price cap level is up from £1,138 for the period covering 1 April 2021 to 31 October 2021.

Food costs have also jumped, but perhaps not as much as expected over the past two years – up £251 in annual terms. This is likely due to families cutting back in response to the cost-of-living crisis, which saw spending on groceries slightly reduce between 2021 to 2022. But households are paying considerably more, £615 a year, on food since 2022 as spiralling food inflation kicks in.

Cost-of-living pain more acute for young adults 

interactive investor research shows the increase in mortgage costs has had a disproportionate impact, hitting young adults the most.

Mortgage costs, based on a 90% LTV mortgage deal, have rocketed to £9,570 a year compared to 2021. Add to that the uptick in food (£211) and energy (£640) costs, essential household spending has soared by £10,421 a year over the past two years.

This compares to £9,244 (£7,975 on mortgage, £935 on energy and £334 on food) for the middle-aged cohort. Meanwhile, pensioners faced a heightened cost burden of £2,828, with the cost of a monthly mortgage repayments jumping by £1,586 over two years (assuming £50,000 mortgage balance) and an £935 and £307 increase in energy and food costs, respectively, over the period.

Costs over one year 

The uptick in mortgage costs means that the cost burden of essential spending has jumped by thousands over a single year (from 2022 to 2023), amounting to £6,094 more on average, rising to £7,219 among young adults (versus £6,152 for middle-aged homeowners and £1,939 for pensioners) according to ii calculations.

Increase in household spending over the past two years

Year

Spending category

Average

Young adult

Middle-aged

Pensioner

Since 2021

Food spending

 £            251

 £            211

 £            334

 £            307

 

Mortgage cost

 £         7,975

 £         9,570

 £         7,975

 £         1,586

 

Energy cost

 £            935

 £            640

 £            935

 £            935

 

Total

 £        9,161 

 £      10,421 

 £        9,244 

 £        2,828 

      

Since 2022

Food spending

 £            615

 £            690

 £            672

 £            562

 

Mortgage cost

 £         5,377

 £         6,452

 £         5,377

 £         1,274

 

Energy cost

 £            103

 £              78

 £            103

 £            103

 

Total

 £        6,094 

 £        7,219 

 £        6,152 

 £        1,939

Assumptions

Mortgage data: based on average mortgage rates logged by the Bank of England (to December 2022). 2023 data base on two-year fixed rate mortgage at 6.75%, according to Moneyfacts data. Mortgage for pensioners based on remaining £50,000 mortgage.

Food inflation data: based on latest ONS Family spending data to April 2022. 2023 figure based on annual inflation of 19% recorded by ONS over 12 months to April 2023.

Energy data: Ofgem

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Personal finances remain in a state of flux, and the current mortgage storm threatens to devastate budgets that are already crumbling under the pressure of the cost-of-living squeeze.

“Higher mortgage costs have been a huge pain point for those hoping to negotiate their way up the housing ladder and those at or near the end of their fixed-rate deal. They face paying almost £8,000 a year more on repayments than in 2021, on average.

“Young adults, who are still very much in the wealth accumulation stage of their life and typically have higher loan-to-value mortgage deals, are particularly feeling the brunt. They face spending almost £9,600 a year more on mortgage costs compared with 2021.

“The double whammy of stubbornly high inflation and rising borrowing cost hacks away at wealth from opposite ends, which makes it more difficult for individuals to hit financial milestones, such as buying a house. The predicted fall in inflation, lead by a fall in energy and food costs, will not touch the sides to what is needed to offset the heightened mortgage burden. As such, the cost of essential spending is likely going to remain higher than Britons want and need them to be to maintain financial resilience.

“There are still a few more hoops to negotiate in the inflation roller coaster we find ourselves on. Therefore, it remains important to keep a keen eye on your finances and consider how best to fortify your finances for the twists and turns that lie ahead.”

Alice Guy, Head of Pensions & Savings, interactive investor, says: “It’s a stressful time for many pensioners and others on low incomes who spend a bigger proportion of their income on essentials. Pensioners have seen their household costs increase by £2,790 in the last two years, a period where the state pension has only increased by £1,261 during the same two-year period. Pensioners have limited options to increase their income, and many are having to cut back on essentials to tide them over.

“There’s a myth that all pensioners are wealthy, but in fact millions of pensioners are struggling on a low income and many get most of their income from the state pension. If you’re over state pension age and struggling on a low income, then it’s important to see if you could be entitled to benefits. Pension Credit tops up your income to £201 each week for single pensioners and £307 for couples, and it also opens the door to other benefits such as a reduction in council tax, housing benefit and cost-of-living payments.

“Sky-high costs are also making it harder for young and middle-aged households to save enough in their pension. People often aim to pay more into their pension once their costs become more affordable later in life, but instead soaring mortgage costs are eating up any spare budget. The cost-of-living crisis is casting a long shadow, making it harder to save for the future and build enough wealth for a comfortable retirement.”  

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