Mortgage Repayments Set to Rise for Millions of UK Households

The Bank of England has warned that approximately three million UK households will see their mortgage repayments rise over the next two years as high interest rates continue to take effect. This will include significant rises of over 50% for about 400,000 households.

Mortgage interest rates have been increasing since 2022

The Bank’s Financial Policy Committee (FPC) has stated that the majority of households have already seen their mortgage rates rise since borrowing costs started increasing notably in 2022. Interest rates are currently at a 16-year high of 5.25%, with the central bank voting to maintain the figure for a seventh consecutive meeting earlier this month.

However, many economists have predicted that interest rates could reduce at the next vote in August. Currently, about 35% of households in the UK that have mortgages - more than three million of them - are paying interest rates below 3%. These households are likely to see their mortgage payments go up by the end of 2026.

The Impact on Households

The rising mortgage rates have resulted in many households and renters reducing their savings, the Bank found. The share of renters falling behind on payment 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.

Rent increases have put pressure on household finances

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 FPC.

However, 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 sharply in recent years.

The report highlighted that high inflation or geopolitical changes could trigger a sell-off which could impact prices.

What This Means for You

If you’re a homeowner or renter, it’s essential to review your finances and prepare for the potential increase in mortgage repayments. Consider reducing your expenses, building an emergency fund, and exploring options to refinance your mortgage at a lower interest rate.

Mortgage planning is crucial in these uncertain times

The Bank of England’s warning serves as a reminder to take control of your finances and plan for the future. By being proactive and making informed decisions, you can navigate the challenges posed by rising mortgage rates and ensure a more stable financial future.