After over a decade in which interest rates have been extraordinarily low by historical standards, recent economic events have seen a sharp reversal. The doubt cast on the UK’s fiscal solvency following the “Mini Budget ” saw a sharp increase in gilt yields – or in plainer English the borrowing costs government faces when raising money through issuing bonds.  In response to downward pressure on the pound and high inflation, the Bank of England has hiked interest rates and is expected to go further over the coming months. 

These events and expectations fed their way into borrowing costs faced by households and businesses – and worryingly rapidly. According to the data firm Moneyfacts, the typical two-year fixed rate mortgage hit 6.3% on Monday 10th October, up from 4.2% at the beginning of September and the highest since November 2008. 

It is hard to overstate the potential implications such moves in rates can have for household finances. Between the end of September and mid-October, the cost of taking out a £200,000 mortgage increased by close to £300 per month. For those looking to get on the property ladder or remortgage this could be an even bigger deal than the current surge in energy bills – and persist for longer. 

Even if the avalanche of U-turns on the Mini Budget calms the bond markets and puts us on a gentler path of rising rates, we are going to see a period of monetary policy tightening, with the Bank of England following the US Federal Reserve amid an environment of high inflation. Bank of England data show that, between the start of the year and the end of August – before the Mini Budget debacle – the average two-year fixed rate rose from 1.6% to 3.6% (for a 75% loan-to-value mortgage). Mortgage costs will be noticeably higher than in the recent past, and house prices potentially on the way down.

And – for the current Government – things could get uglier still if rising rates cause the house price bubble to finally burst, plunging households into negative equity and making it difficult for them to escape high mortgage costs through selling their home. Credible institutions are not ruling out declines in house prices of 25% or more in the run up to the next election.  

For the Conservatives, this could prove eerily similar  to the 1990s, during which falling and stagnant house prices, negative equity, high interest rates and home repossessions played a key role in the then-Government falling dramatically out of favour with the electorate.

Could the economics and politics play out differently this time? One key difference since the early 1990s is that mortgage holders are a much smaller share of the electorate. According to the 1991 Census, 43% of households in England were owner-occupiers with a mortgage. Data from the English Housing Survey suggest this share has fallen significantly to about 30% in 2020-21. 

Share of households with a mortgage and owning their home outright in England

Source: Census 1991 and English Housing Survey 2020-21

 In large part, this reflects Britain’s ageing population which means more people now own their home outright – the share of such households in England increased from 24% to 35% between 1991 and 2020-21. 

 Does this provide any relief for the Government? Conceivably a narrative could be spun that higher interest rates are good for most households – deflating a housing bubble that was locking the young out of homeownership and providing less paltry returns for savers.

But the problem with this is that the benefits for most savers are likely to be far smaller than the costs to mortgage holders. And while house prices might fall, prospective first-time buyers will face much higher mortgage costs. Their landlord might also put up the rent to cover higher buy-to-let mortgage costs. All households, regardless of their tenure status, will feel the economic fallout from rising mortgage costs, causing many to tighten their belts and rein in spending elsewhere.  

Maybe the saving grace for the Government is how this all plays out geographically – it matters less politically if those facing the most pain from higher mortgage rates are concentrated in certain corners of the country. But this seems unlikely. Looking at General Election 2019 data, there were just over 40 Conservative constituencies with modest majorities (<20%) and with an above-average number of mortgage-holders. This ranges from Esher & Walton and Watford in the South to Macclesfield in the North. 

 Perhaps the most political and economic pain will be in the South of England; using ONS and Equifax data on outstanding mortgage debt by local authority, we have estimated the exposure of different constituencies to rising interest rates through creating a measure of how leveraged households are. Our Mortgage Leverage Index looks at outstanding mortgage debt as a share of average household income in each area, and adjusts for the share of households that actually have a mortgage in different parts of the country. 

While Southern constituencies are typically (though not always) relatively affluent, high house prices mean that households are likely to be relatively leveraged. Marginal constituencies in Cornwall and the Home Counties (such as Watford and Guildford) are among the most leveraged in England on our measure. On our calculations, there are 45 constituencies where the Conservatives have a majority of less than 20% and where the Mortgage Leverage Index is above average. These are concentrated in the South. 

If other factors do not push voters away from the incumbent party in these constituencies, higher interest rates may be the straw that breaks the camel’s back. 

Source: Public First analysis of ONS and Equifax data