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Next release:
To be announced
Release date:
26 February 2024
Contact:
Sumit Dey-Chowdhury, Tom
Evans, Stefan Ubovic
+44 2075 928622
Article
Role of owner-occupiers' housing costs in
the Household Cost Indices, UK : 2023
The impact of higher mortgage interest rates on household costs, on average and by
different household subgroup
Table of contents
1. Main points
2. Background
3. The impact of higher mortgage interest payments on HCIs
4. The pass-through of higher interest rates into mortgages and time deposits
5. Glossary
6. Data sources and quality
7. Related links
8. Cite this article
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1 . Main points
Average UK household costs, as measured by our Household Costs Indices (HCI), increased by 5.0% in
the year to December 2023, following a 12.4% increase over the same period in 2022; on a cumulative
basis, household costs are up 24.7% since December 2019.
Owner-occupiers' housing has been an important driver of this increase in household costs, which have
overtaken food and energy prices as the main contribution to the annual rate of change in our Household
Costs Indices (HCI).
Households with the largest mortgages were most exposed to this increase in owner-occupiers' housing
costs, which most often include working-age households with children and above-average disposable
income.
Higher savings and better financial resilience have meant mortgage holders were better able to absorb
increases in housing cost compared with renters.
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2 . Background
Consumer price inflation in the UK is still high, which has resulted in an increased cost of living for UK
households. Our Household Cost Indices (HCIs) capture changes in the costs and prices that households are
facing. The HCIs measure how much a household's disposable income would need to change, in response to
changes in costs and prices, so that they could purchase the same quantity of goods and services.
There was a 5.0% increase in the HCI in the year to December 2023, for an average household. Costs are still
increasing, although at a slower pace compared with a year ago. On a cumulative basis, this average HCI has
increased by 24.7% since December 2019.
HCIs provide more insight into some of the distributional effects of these higher costs and prices, including how
different types of households may change their consumption in response. This enables us to explore whether
there has been an uneven impact of this period of high inflation, reflecting the varying consumption patterns of
households and the ability to adjust their consumption in response to changes in prices.
Food and energy prices were initially the main driver of this increase in household costs, which comprises a
higher share of consumption of low-income households. More recently, the contribution of housing costs has
become increasingly substantial, overtaking food and energy as a leading driver of the annual increase in the
HCIs. This was driven by the shelter component as rents and mortgage interest payments increased over the last
two years (Figure 1). These payments increased as fixed-rate mortgage products that were initially locked in
during the period of low interest rates then expired, so that an increasing number of households have had to
remortgage at a higher interest rate. The level of house prices is still high despite this increase in interest rates, to
the extent that new mortgagors (the borrower of a mortgage) still require large loans to finance their house
purchases. These trends have pushed up the cost of owning a home, with some household subgroups seeing
more impact than others.
The impact of higher mortgage rates will be captured by the owner-occupiers housing (OOH) component within
our HCIs, where the effect on the costs and prices are likely to vary by type of household. The HCIs enable us to
explore whether there are some types of households that have been more exposed to the increase in the cost of
owner-occupied housing.
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1.
Figure 1: Higher mortgage rates have contributed to an increase in shelter costs faced by households
over the last year, including owner-occupiers and renters
Contribution to the annual Household Cost Indices (HCI) rate of change, UK, December 2022 and December 2023
Source: Office for National Statistics
Notes:
Housing shelter includes private rentals, social rentals, and owner-occupiers' housing costs. Household
energy includes electricity, gas, liquid, and solid fuels. Household services includes repairs of dwelling
services and materials, water supply, sewage collection, council tax, and UK holiday rents. Together,
housing shelter, household energy, and household services are the component parts of the Housing,
Water, Electricity, Gas and Other Fuels division.
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3 . The impact of higher mortgage interest payments on HCIs
The HCIs focus on the payments made for a basket of goods, services, and other financial transactions, including
how this cost and price experience varies by household. One example is owner-occupiers' household costs
(OOH), which measure what it costs owner-occupiers to live in their own homes. Unlike CPIH, the HCIs are
based on the payments approach, which includes changes in mortgage interest payments. These are the actual
costs paid by households out of their disposable income, rather than imputed rents, which are a proxy for the cost
of consuming shelter as a housing service. The payments approach also includes changes in stamp duty rates
and other payments as represented by dwelling insurance, ground rent, estate agent fees, home-buyers surveys,
and house conveyancing.
Figure 2 shows the role of OOH costs to the annual change in HCI for an average household over the last 15
years. There have been 2 periods where there have been relatively large changes in OOH costs. The first in
2008 and 2009, reflecting a loosening in monetary policy in response to the financial crisis, which resulted in
lower mortgage interest payments. Please note that there was a methodological change during this period. Up to
January 2010, the interest rate was a weighted average of the Standard Variable Rate (SVR) offered by banks
and building societies. This was replaced with the Average Effective Rate (AER), which also includes other
mortgage types such as fixed rate, discount, and tracker mortgages. For more information, please visit our CPI
.Technical Manual methodology page
The second period has taken place over the last 18 months as there has been a tightening in monetary policy in
response to higher inflation. Taken together, OOH costs increased by about 23% in the year to December 2023
according to the payments approach, contributing 0.8 percentage points to cost inflation over the same period for
an average household.
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1.
Figure 2: Higher mortgage interest payments over the last 18 months have contributed to higher costs
experienced by households
Owner-occupiers' housing (OOH) costs contribution to the Household Cost Indices (HCI) annual rate of change, UK, 2008 to
2023
Source: Office for National Statistics
Notes:
MIPs denotes mortgage interest payments.
Higher mortgage interest payments (MIPs) were the main driver of this increase in OOH costs, mainly driven by
higher interest rates and partly by the increase in house prices following the coronavirus (COVID-19) pandemic,
which meant that owner-occupiers needed to take up larger mortgages and provide larger deposits to achieve the
same loan-to-value ratios.
Stamp duty rates were another driver of owner-occupiers housing costs in recent years. The stamp duty holiday
during the pandemic subtracted on average about 0.3 percentage points from annual cost inflation between July
2020 and June 2021. The stamp duty holiday was introduced in July 2020 to stimulate the housing market during
the pandemic. The tax break meant buyers were exempt from stamp duty for properties below £500,000,
resulting in potential savings of up to £15,000. Initially it was set to end in March 2021, but was extended to July
2021, before being phased out and withdrawn totally in September 2021.
The subsequent phasing out of the stamp duty holiday - together with base effects from the previous reduction in
stamp duty rates - pushed up annual HCI inflation between July 2021 and September 2022 by a similar amount.
More recently, the contribution of stamp duty rates has turned negative owing to our house price index edging
lower in 2023 - for more information, please see our .UK House Price Index: December 2023 bulletin
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The contribution of Other OOH - dwelling insurance, ground rent, estate agent fees, home-buyers surveys, and
house conveyancing - was generally small owing to its low weighting within our HCIs. It has seen some increase
in recent years as rising costs of labour and materials pushed up insurance premiums while changes in market
regulation reduced the discounts insurers could give to new customers compared with their existing business.
Similarly, the strength of the housing market during the pandemic pushed up estate agent, surveyor, and
conveyancing fees. Ground rent has also increased, which might reflect higher land and property prices.
The contribution of MIPs is about zero for outright owners, as they do not pay mortgage interest, although a few
might have loans on second homes. In comparison, the contribution of MIPs for mortgagors was 2.7 percentage
points in the year to December 2023 (Figure 3), up from 2.1 percentage points in the year to December 2022.
Such differences in housing tenure status also explain much of the difference in the MIPs' contribution to the
annual increase in costs for retired and non-retired households, for households with and without children, and for
households by different income deciles (Figure 3).
Figure 3: The role of mortgage interest payments in costs varies by household type, reflecting their
tenure status
Mortgage interest payments (MIPs) contribution to Household Cost Indices (HCI) annual rate of change by subgroup, UK, 2022
and 2023
Source: Office for National Statistics
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1.
Table 1 shows that the share of mortgagors is larger among higher-income households (9th income decile at
46%) than among lower-income households (2nd income decile at 15%). This is to be expected as high-income
households typically have better access to mortgage finance and can more easily save for a house deposit.
Mortgagors are also usually of working age as retirees have in most cases paid back their mortgages. Also,
mortgagors at lower and middle incomes are typically more likely to live with children while high-income
mortgagors are more likely to live without children. Lower-income households more often tend to be renters
(41%) than mortgagors (15%). They are also often owner-occupiers in the case of retirees on pensions that rank
them at the lower end of the overall income distribution.
Table 1: The share of mortgagors is larger among higher-income households than among lower-income
households
Tenure status of different household groups
% of total Mortgagor
Outright
owner
Private
renter
Social
renter
Retired 3% 79% 5% 13%
Non-retired 42% 20% 22% 37%
With children 51% 10% 20% 18%
Without
children
23% 46% 17% 14%
2nd decile 15% 44% 19% 22%
5th decile 31% 34% 16% 18%
9th decile 46% 33% 17% 4%
Source: Office for National Statistics
Notes
Deciles refer to household equivalised disposable income.
One factor that could help higher-income households absorb the increase in mortgage interest payments is that
they typically have a higher savings than lower-income households. Our Opinion and Lifestyle Survey shows a
higher share of renters (46%) than mortgage holders (36%) reported finding it difficult to afford their rent or
mortgage, despite mortgage interest payments having increased by more than rents in our HCIs. One potential
explanation is that mortgagors, on average have more disposable income than renters, to manage increases in
costs. Similarly, mortgagors spend a lower share of their disposable income on mortgage interest payments
compared with the share of income that renters spend on paying rent.
Our Wealth and Asset Survey also suggests that a lower share of household who rent (52%) were financially
resilient compared with mortgagors (78%) and outright owners (93%), where financial resilience was measured
as having sufficient savings to cover a quarter fall in employment income over a three-month period. For more
information on distribution of cost-of-living pressures across different populations, see our Impact of increased
.cost of living on adults across Great Britain article
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4 . The pass-through of higher interest rates into mortgages
and time deposits
The increase in the contribution of MIPs to annual HCI inflation in recent years has mainly been driven by higher
mortgage rates. The extent to which higher interest rates will feed into mortgage rates will reflect the composition
of fixed- and variable-rate mortgages in the UK economy, which has changed over time. For instance, fixed-rate
mortgages accounted for 88% of total mortgages outstanding in Quarter 4 2023, of these 26% are fixed for up to
2 years and 68% are fixed for up to five years.
The effective rate on the stock of mortgages outstanding has increased to about 3.4% in December 2023 from
around 2.1% during the coronavirus (COVID-19) pandemic (Figure 4). A part of the increase in mortgage interest
payments was also driven by higher house prices as the average UK house price, as reported in our UK House
, increased by about 23% over the four years to December 2023. This means Price Index: December 2023 bulletin
that mortgagors are now borrowing larger amounts to finance their house purchases, compared with pre-
pandemic levels.
Figure 4: There has been a sharp increase in the effective interest rate on the stock of mortgages in the
UK
Effective interest on the stock of outstanding mortgages, UK, 2018 to 2023
Source: Bank of England, Office for National Statistics
Mortgage interest payments will continue to increase as long as interest rates on new mortgages remain above
the effective interest rate on the outstanding mortgage stock. For example, about 25% of mortgagors, currently
paying fixed-rate mortgages, will reach the end of fixed-rate periods (also known as "fixes") within the next two
years. Their average interest rate was around 3.8% in December. If these households were to remortgage at
quoted market rates as of January 2024, their quoted interest rates would usually be between 4% and 7%,
depending on their loan-to-value (LTV) ratio and whether they opt for a two-year or five-year fixed rate (see Table
3). This would push up the effective interest rates on outstanding mortgages, leading to higher average
household mortgage interest payments, and therefore further increasing the household cost indices (HCI).
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1.
Table 2: Quoted household interest rates on fixed mortgages
By loan-to-value ratio and period of interest rate fixation
%, January
2024
60% LTV 75% LTV 90% LTV 95% LTV
2-year fixed
rate
4.6 4.7 5.4 5.9
5-year fixed
rate
4.3 4.4 4.8 5.2
Source: Bank of England, Office for National Statistics
Notes
Quoted interest rate series are calculated monthly by the Bank of England, as weighted averages for a
range of lending products offered to households.
The impact of higher mortgage interest payments on household consumption might be partly offset by higher
income on households' savings as interest rates paid on time deposits also increased (Figure 5). The pass-
through of higher interest rates into the stock of outstanding time deposits accelerated last year compared with
mortgages, as rates on time deposits are typically fixed for a shorter period.
Figure 5: Higher interest rates contributed more quickly to the effective rate on household savings as
time deposits are typically fixed for shorter periods compared with mortgages
Effective interest on the stock of outstanding deposits, UK, 2018 to 2023
Source: Bank of England, Office for National Statistics
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1.
2.
The benefits of the increase in savings rates and the costs of higher mortgage payments will accrue to different
household groups, depending on their individual financial situation and whether a household is a net lender or a
net borrower. Our Opinions and Lifestyle Survey suggests that a higher share of households may have used their
savings and/or borrowed more in 2023 compared with 2022, as a response to higher cost of living. However, the
dissaving rate, that is the rate at which households used or withdrew their savings, slowed slightly in recent
months (Figure 6). Low-income households more frequently reported using credit and less frequently reported
using savings relative to high-income households.
Figure 6: There is some evidence that an increasing share of households used savings and/or borrowed
more in 2023 compared with 2022
Household responses to increased cost of living
Source: Office for National Statistics
Notes:
Dates denote last day of reference period.
Data may have some breaks as the questionnaire evolved over time.
5 . Glossary
Disposable income deciles
Households are grouped into deciles (or tenths) based on their equivalised disposable income. The richest decile
(decile 10) is the 10% of households with the highest equivalised disposable income. Similarly, the poorest decile
(decile 1) is the 10% of households with the lowest equivalised disposable income. It should be noted that the
second and ninth deciles are more stable, so users may wish to consider these in their analysis.
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Households with children
A child is defined as any person aged under 16 years. For the purposes of the Family Spending report, people
who are aged under 18 years and unmarried are also classed as children. A household is classified as a
household with children if at least one member of the household is a child.
Outright owner-occupier households
Owner-occupier households are defined as any household in which the residents own the property outright and
use it as their primary or non-primary residence.
Mortgagor and other owner-occupier households
Owner-occupier households are defined as any household that is buying their primary or non-primary residence
property with a mortgage, or own part of the property (for example, paying both rent and mortgage).
Renter households
A renter household is defined as any household that rents their property from a private sector landlord. It
excludes households who live in their property rent free.
Social and other renter households
Non-private renter households are defined as any household that rents their property from a council or a
registered social landlord or lives in their property rent free.
Retired persons and households
A retired person is defined as anyone who describes themselves in the Living Costs and Food Survey (LCF) as
"retired" or anyone over minimum National Insurance pension age describing themselves as "unoccupied" or
"sick or injured but not intending to seek work". A retired household is defined as one where the combined
income of retired members amounts to at least half the total gross income of the household.
6 . Data sources and quality
Household prices
While the calculation of inflation rates for household groups is straightforward analytically, data constraints make
their estimation challenging in practice. An analysis of household group-specific inflation rates would ideally use
price indices and expenditure weights specific to each household group. This would reflect the fact that different
households will purchase goods and services from different outlets and, therefore, face different prices.
However, such data are not available and, therefore, we have had to use national price indices as an
approximation. There are also challenges that arise from the data sources that we have available for us to
calculate the expenditure shares. These limitations do not impede the validity of the chosen methodology and its
robustness. For more information, please see our Methodology to calculate CPIH-consistent inflation rates for UK
.household groups
Further information on strengths, limitations, appropriate uses, and how the data were created is available in our
.Household Costs Indices for UK household groups QMI
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7 . Related links
Household Costs Indices for UK household groups
Bulletin | Released 26 February 2024
Household Costs Indices, 12-month growth rates, expenditure shares and contributions for UK household
groups and all-households.
How increases in housing costs impact households
Web page | Released 9 January 2023
Mortgage interest rates started to increase during 2022, this is likely to make borrowing more expensive for
those with fixed rates deals coming to an end in 2023. Those with variable rate mortgages and private
renters are also facing higher housing costs.
Measuring changing prices and costs for consumers and households
Article| Released 4 December 2023
Description of the different measures and approaches to inflation in the UK: Consumer Prices Index
including owner occupiers' household costs (CPIH) and Consumer Prices Index (CPI), Household Costs
Indices (HCIs) and Retail Prices Index (RPI).
Household expenditure data insights into the effects of costs-of-living pressures
Bulletin| Released 4 December 2023
Insights into the impacts of a period of price increases and cost-of-living pressures, and behavioural
response of consumers, using household expenditure data.
Consumer price inflation, UK
Bulletin| Released 14 February 2024
Price indices, percentage changes, and weights for the different measures of consumer price inflation.
UK House Price Index
Bulletin| Released 14 February 2024
Monthly house price inflation in the UK, calculated using data from HM Land Registry, Registers of Scotland,
and Land and Property Services Northern Ireland.
Shopping prices comparison tool
Web page| Released 3 May 2023
Search to see how the average prices of hundreds of shopping items are changing.
How is inflation affecting your household costs?
Web page | Released 23 March 2022
Use our inflation calculator to see how increases in the cost of living have affected you in the past year.
Consumer Prices Indices Technical Manual, 2019
Methodology | Last revised 22 March 2023
This technical manual is a reference tool for anyone wanting to understand how measures of consumer
price inflation and associated indices are compiled.
8 . Cite this article
Office for National Statistics (ONS), released 26 February 2024, ONS website, article, Household Cost
Indices: The role of owner occupiers' housing costs
