Middle and high income earners

ended 25. May 2022

A journalist at the Daily Telegraph is writing an article about how middle and high income households will also struggle during the cost of living crisis. Will rising mortgage rates hit middle income and wealthy people, too? Can you see many higher net worth individuals struggling to cover costs? Deadline is ASAP.

6 responses from the Newspage community

It's the age-old adage that people live up to their means. Those with higher wages tend to have more expensive homes that cost a lot to heat and often have huge mortgages that exceed standard income multiples. To get higher mortgage borrowing, the sweet spot for a handful of lenders is an LTV equal to or below 75% and income over £100k; then, you can borrow up to 5.5x your income, in some cases more. This means that if interest rates go up, yes those with modest mortgages may see payments rise by perhaps £30-£50 a month. However, if you've got a mortgage of £600,000, 20 years left, and tied into a good deal 18 months ago you could see your monthly payment rise from around £2813 and jump up to approximately £3223, an increase of more than £400 a month. Add into this the increasing cost of food, fuel and utilities you're looking at a significant reduction in disposable income.
I honestly think the majority of people will be impacted by this cost of living crisis. We naturally become accustomed to a certain way of living and find the more people earn the more they are likely to spend and ultimately tend to have a larger mortgage. We're speaking to clients who are now coming to the end of their current fixed deals and hitting with the news that their mortgage payments are now going to be a few hundred pounds a month more. That added with the fuel, energy, and food costs rise, it could easily wipe out any disposable income that the family has available. Therefore I have no doubt if this continues we may see changing spending habits across the board and more families reaching the point of struggling to cover everyday costs.
There will be a percentage of people who will not, regardless of their income, be able to absorb the rapid increase in living costs and the impact on these individuals and families will feel as significant to each one of them. My family and I were in a comfortable financial position before the Credit Crunch and that kicked me so hard in the money bag that we are still not back to where we were. The emotional stress was tremendous and it was a long road out. There is a chance that what is looming is a beast of equal damage to those highly geared and financially committed.
There is no doubt everyone is going to be impacted by rising mortgage rates. Those with larger mortgages are of course going to see their monthly repayments increase more. However, this will be relative to their income. Higher earners can borrow 5.5x income with certain high street lenders. HNW clients have greater flexibility and do not have any limits on how much they can borrow. As a HNW broker based in London, many of the wealthier clients we deal with prefer interest only mortgages. This allows them to borrow large amounts of money with a very low monthly cost to help with cash flow and free up funds for other investments. For example, someone borrowing £1 million on interest only and paying 3% interest, will only pay £2500 per month. Whereas, on capital repayment over 25 years, this would cost £4785 per month. Having the loan on interest only means even if rates increase, the monthly repayments will still be affordable.
Those with larger mortgage balances will see a bigger impact on their payments if their interest rate increases. Lots of people have borrowed up to their maximum potential over the past couple of years, on the lowest interest rates in history and given that rates have doubled in the last 6 months borrowers will have a nasty shock if they are reaching the end of a fixed rate any time soon. Those that borrowed at low loan to values will see the largest increases and we are regularly seeing increases of a few hundred pounds on like for like remortgages.
Many middle income and even higher income households will not be insulated from the cost of living crisis, especially if, as expected, mortgage and interest rates rise significantly. Across the board people have taken advantage of cheap lending but the more you have borrowed the more perilous your situation can quickly become. As people come to the end of their fixed mortgage terms at the same time as their financial commitments rise they suddenly find that they no longer pass strict affordability tests to get the better deals by switching lenders, instead have to remain with their existing mortgage borrower. It means their mortgage payments can suddenly go up hundreds of pounds a month. Similarly, many people are finding that their car finance deals are coming to end with no equity left in the vehicle. It means they then have to borrow more money at a higher rate at a time car prices are rising. The energy crisis means that although living expenses for wealthier households may not rise proportionately as much as for lower income families the overall cost is likely to be much more. Put simply, it costs more to heat a larger house. All these things combine to mean that, whatever your income, its likely that everyone is going to have to tighten their belts and make some significant lifestyle changes to ride out the cost of living crisis.