The barometer suggests that cost of living pressures over the next year are set to be exacerbated by the recent surge in mortgage rates.
Although these have begun to fall back in light of developments in the gilt markets, they remain well above levels that were enjoyed by households in the first half of 2022, a trend that Hargreaves Lansdown expects to continue this year.
It suggests that this dynamic will “create a lottery” among homeowners with those who are fortunate enough to avoid refinancing in 2023 facing much lower borrowing costs than those who will need to refinance and first-time buyers.
Hargreaves Lansdown also assessed the impact of a severe downturn in the housing market.
If house prices were to fall more sharply by 18% in the face of various headwinds, the report says such an outcome would deepen the expected scale of the recession this year, with consumers retrenching further and firms cutting back on investment.
With a bigger fall in house prices, homeowners would see their average retirement resilience score drop seven times more than for renters.
The fall in scores for Gen Z and Millennials was three times larger than for older people.
The barometer also reveals that the UK’s financial resilience has fallen back to 60.5, down from a peak in Q4 2021 at 63.7 but still higher than the pre-pandemic level of 58.8.
The report reveals that the outlook for UK households has darkened further since the July publication, with expectations now that inflation will remain higher for longer.
“More persistent inflation has been coupled with a recent spike in interest rates which has exacerbated the living cost crunch for those homeowners that have recently needed to roll over their mortgage,” the barometer notes.
Hargreaves Lansdown senior personal finance analyst Sarah Coles adds: “House prices are heading for a fall in 2023, which risks crushing our finances. People with mortgages will still be reeling from the short-term blow of higher interest rates when they’re hit with the horrible news about the damage to their long-term financial resilience.”
“We’re used to falling house prices affecting how we feel about money. Homeowners tend to feel less well off, so may cut their spending – particularly on home improvements and furnishings. Property equity is also used as a last resort by some people to access lump sums when they remortgage. The inability to dip into growing equity will force them to make big changes to how they spend.”
“Falling house prices have a profound impact on our long-term resilience too. The Barometer shows that if house prices were to fall 18%, later life resilience would drop seven times more for homeowners than for renters in the coming year. This owes much to the fact that in order to get a rounded picture of people’s retirement income and outgoings, the Barometer looks at home ownership – and how much equity people have in their home, alongside pension savings and other assets. The idea is that the less equity you have when you get to retirement, the more you’ll need to pay to keep a roof over your head.”
“Rising house prices automatically build the equity in your home, because the mortgage becomes a smaller percentage of the value of the property. Conversely, falling house prices shrink the amount of equity you hold. The more you borrow, the more any changes are magnified, so the average score drop for Gen Z and Millennials was three times larger than for older people, because they tend to have borrowed a larger proportion of the house value.
This is coming at a time when rising mortgage rates are adding an average of £250 to people’s monthly outgoings, which hits overall resilience too.”
“The Barometer shows our savings will take a dive as people remortgage this year. Some people will be forced to spend more of their income rather than squirreling it away, and others will spend their savings. Debt is also a concern, as some will struggle to balance a tighter budget, and start to build expensive short-term debts.”
“Times are increasingly tight for homeowners, who face falling savings, rising debt, and an increasingly uncertain long-term future. If your mortgage is set to rise, it’s essential to take stock and work on cutting your costs, to help protect your savings and stave off debt. If you’re tempted to change your mortgage arrangements to bring prices down – by switching to an interest only mortgage for a period, or extending the term, you need to consider all your options, and the impact it will have on when you can afford to retire.”
