Changes to the UK mortgage market and improving household balance sheets, including “forced saving” during the pandemic, have helped to deliver a £16bn household income boost from higher interest rates.

According to new research published by the Resolution Foundation, this income boost is not only “unprecedented” in recent UK economic history, but internationally too. Similar rate rising cycles have delivered only a very modest income boost in Europe, and an income fall in the US.

The think tank examined the impact of the Bank of England (BoE) recent rate rising cycle between December 2021 and August 2023, when interest rates increased from 0.1% to 5.25%, on household balance sheets and incomes.

It suggested that rate rising cycles have tended to push up households’ debt repayments by more than any extra income from savings during the past four cycles in the 1980s, 1990s and 2000s – directly reducing household incomes.

However, the opposite has happened over the course of the BoE’s latest rate rising cycle, delivering British households an income boom of around £16 bn, which accounts for three fifths of all household income growth over this period.

“When interest rates rose in the 80s, 90s and 2000s, household incomes tended to fall directly, with interest payments on debt rising by more than extra income from savings,” said senior economist at the Resolution Foundation, Simon Pittaway.

“But changes to the UK mortgage market and enforced saving during the pandemic have meant that the Bank’s latest rate-raising cycle has actually boosted household incomes by £16bn.”

The Foundation suggested that changing mortgage preferences have played a key role, with fixed rate deals replacing variable rate deals, and five-year fixes replacing two-year fixes as the most popular mortgage product.

This has slowed the pass-through from interest rate rises to mortgage costs, with 37% of households that had a mortgage when the Bank started rising rates in 2021 yet to see their fixed rate deal come to an end.

By contrast, the income boost from higher savings interest has been more immediate – with real income from savings rising by £34bn – more than offsetting the £18bn rise in debt interest costs to give a net interest income boom of £16bn.

Improving household balance sheets have also left the UK better placed to benefit from rising interest rates.

Pittaway added: “The impact of the unlikely income boost has been very uneven – older, asset-rich households have gained the most, while younger mortgagor households have been hit hard.

“And while rising rates have boosted incomes over the past two years, they are likely to reduce them in the year ahead – presenting a fresh living standards challenge in an election year.”

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