About three million UK households are still set to witness hikes in their mortgage repayments over the next two years, the Bank of England said. The Bank's Financial Policy Committee (FPC) highlighted that this will include "very large increases" of more than 50% for the mortgages of around 400,000 households. Despite the looming challenges, the central bank emphasized that UK lenders are in a strong position to support households and businesses, even in a worsening economic scenario.
Increasing Mortgage Rates:
The Bank's latest Financial Stability Report revealed that most households have already experienced an increase in their mortgage rates since borrowing costs started rising significantly in 2022. With interest rates at a 16-year-high of 5.25%, the central bank has decided to maintain this figure for the seventh consecutive meeting earlier this month. However, many economists have suggested a potential rate decrease at the next vote in August.
Impact on Households:
Currently, around 35% of households with mortgages, totaling over three million, are currently paying below 3% and are expected to face an increase by 2026. A typical household coming off a fixed-rate mortgage before 2026 is likely to see a jump of approximately £180 a month, according to the report. The report also noted an "increasing proportion" of households opting for longer borrowing periods to reduce monthly repayments, potentially leading to higher debt levels in the long run.
Risks and Challenges:
The report highlighted that higher mortgage rates have resulted in many households and renters dipping into their savings. Renters falling behind on payments increased to 16.5% in the first quarter of 2024, compared to 15.7% a year prior, following significant rent hikes. Survey data indicated that many renters and low-income households plan to further deplete their savings to cope with the rising cost of living. Despite these financial pressures, the overall risk environment for the economy and financial sector remains largely unchanged, with the banking sector capable of supporting households and businesses even in adverse conditions.
Global Vulnerabilities:
The central bank also highlighted "global vulnerabilities" for the banking sector, including potential policy uncertainties associated with upcoming elections worldwide. Financial markets face the risk of a "sharp correction" in asset prices due to factors such as high inflation or geopolitical changes, which could impact prices significantly. The report cautioned that investors may be underestimating risks, such as geopolitical events or persistent high inflation, which could lead to a sudden asset price correction, making borrowing more challenging and costly for UK households and businesses.