When Prime Minister Liz Truss announced that energy bills would be capped at £2,500 a year for the average home, most of us felt a sense of relief. We could avoid the truly mind-boggling bills in the months to come – even if the bill would eventually be picked up by taxpayers.
The tax cuts promised in this week’s mini-Budget and the prospect of changes to stamp duty, too, offer respite to a weary nation’s disintegrating finances.
But these all represent simply a momentary breather in a quickly darkening picture, with the Bank of England confirming Britain is already in a recession.
The energy bill guarantee has its limits: the average household still faces paying 64pc more for gas and electricity than last winter, and many homes will be paying far more than £2,500.
And even if it brings headline inflation down five percentage points or so – as some forecasters have predicted – the price of food, fuel and other essentials are still far higher than they were a year ago.
These helpful measures are all irrelevant in the face of soaring interest rates, which are rising so high and so fast that many will be unable to pay their mortgage. Assuming this week’s 0.5 percentage point rise is passed on directly, the average rate for a typical buyer on a two-year fix will rise from 3.64pc to 4.14pc, according to Hamptons estate agents.
We face more than a year of hell: markets expect the Bank Rate to hit 3.5pc by the end of the year and have forecast that it will peak at 4.5pc in 2023.
In real world terms, that equals mortgage rates of 6.39pc. Of course, that only affects those forced by circumstances to move or those who need to remortgage, but that number is not insignificant: 1.8 million fixed-term deals are expiring next year.
Already, more than a fifth of homeowners have looked into changing mortgage deals because they can’t keep up with payments anymore, according to research by iPlace Global, a proptech company. Analysts are concerned that hundreds of thousands will no longer be able to qualify for a competitive remortgage deal and so will be trapped on higher variable rates.
The Bank was widely expected to crank the Rate up 0.75 points, which would have been the biggest jump since 1989, just before the deep recession of the early 1990s, which was characterised by mass repossessions and forced sales.
Back then, the Base Rate was 14pc but inflation was around half what it is now. Households were far less stretched than they are today.
We’re not in danger of a 1990s rerun – in part because of the stress tests that banks must carry out since the financial crisis.
And ironically it is lenders’ caution that will prevent hundreds of thousands of homeowners from being able to remortgage on to a fixed deal.
The housing market will grind to a halt as transactions go through the floor. Hundreds of thousands of families will be experiencing financial hell over the next few years, as their homes become increasingly unaffordable to own. And no amount of Budget rabbits in hats can help.