Mortgage Repayments Set to Rise for Millions of UK Households
Around three million UK households will see their mortgage repayments rise over the next two years as high interest rates continue to take effect, the Bank of England has said. As many as 400,000 homes are likely to experience “very large increases” of more than 50%, its financial policy committee said.
UK households face mortgage repayment hikes
Interest rates have been brought to a near two-decade high of 5.25% in an effort to clamp down on price rises behind the cost of living crisis. Inflation - the pace of price rises - had been at a 40-year high but now stands at the Bank’s 2% target as the high interest rates made borrowing more expensive and limited spending.
Despite the higher base interest rate set by the Bank, more than a third of mortgage holders (35%) are still paying a mortgage rate of less than 3%, the financial policy committee said on Thursday in its financial stability report. This is because they signed up for a deal before the energy price shocks which resulted from the war in Ukraine.
Once those deals come to an end, households will have to sign up to a more expensive product. Most mortgage holders, however, have repriced since mortgage rates started the cycle of increases late in 2021.
A typical household rolling off a fixed-rate mortgage before the end of 2026 is due to face a jump of around £180 a month, the report said. It is the job of the financial policy committee to ensure the UK financial system can handle economic shocks and risks.
The body said UK lenders are still in a strong position to support homes and businesses, even if the economy worsens. At present, interest rates are expected to come down in the coming months with a cut forecast for August, September, November and December.
But consumers have been warned not to expect a return to the era of ultra-low interest rates. The chief executive of the UK’s largest lender Charlie Nunn told Sky News the new normal is mortgage rates of 3.5% to 4.5%.
Mortgage rates set to rise
The Bank of England also highlighted that an “increasing proportion” of households have been choosing to borrow over a longer period of time, reducing monthly repayments but leaving them with more debt to service over time.
The bank added that the share of renters falling behind on payments increased to 16.5% in the first quarter of 2024, compared with 15.7% a year ago, after significant increases in rents year-on-year.
Survey data also found that “many renters and low-income households intend to run down their savings even further” in the next year to deal with the increased cost of living.
The central bank stressed that, despite pressure on household finances, the overall risk environment for the economy and financial sector is broadly unchanged.
The banking sector “has the capacity to support households and businesses even if economic and financial conditions were to be substantially worse than expected”, according to the bank.
But there are “global vulnerabilities” for the sector, including “policy uncertainty” associated with upcoming elections across the world, including in the UK, the US and France in the coming months.
Financial markets also face the risk of a “sharp correction” to asset prices, which have risen significantly in recent years. The bank also highlighted that high inflation or geopolitical changes could trigger a sell-off which could impact prices.
Global economy faces uncertainty
In conclusion, millions of UK households are set to face significant increases in their mortgage repayments over the next two years. With interest rates expected to remain high, it is essential for households to plan and budget accordingly to avoid financial difficulties. The Bank of England’s warning serves as a reminder of the importance of financial prudence in uncertain economic times.
