The Bank of England has warned that almost one million homeowners’ fixed-rate mortgages will climb by about £500 per month by 2026.
According to the Bank’s projections, higher interest rates will cause a substantial increase in mortgage costs across the country.
It comes as the UK’s main banks have passed yearly stress tests, indicating that they are strong enough to continue lending to clients and businesses even if the economy suffers a catastrophic downturn.
However, the Financial Stability Report stated that increased borrowing rates and living costs are putting a strain on small enterprises and households. Here’s how your mortgage might change in the coming years.
Fixed-rate mortgages
Fixed-rate mortgage holders are facing difficulties as arrangements expire and the average cost of monthly payments rises.
It comes as people continue to struggle with rising living costs and rising interest rates.
When fixed-term mortgage terms expire, borrowers are forced to pick between more expensive deals or a costly Standard Variable Rate (SVR).
Higher interest rates are progressively affecting homeowners who have a fixed-rate mortgage for two or five years.
If they refinance during the second half of this year, the average household’s monthly interest payments will rise by roughly £220, and their rate will rise by about 3.25 percentage points.
What is the economic outlook?
UK households are facing higher debt burdens against rising interest rates, with more mortgage holders coming to the end of their fixed-rate deals. This means people owe more money to banks.
Households’ use of consumer debt has increased, and the number of people falling into arrears increased slightly in the first quarter of 2023, the Bank found.
Higher interest rates are also putting some firms under pressure, especially smaller businesses with more debt.
Giving a press conference after the report was published, the Governor of the Bank of England said there “will be consequences” of higher interest rates on borrowers.
Speaking to reporters, the governor of the Bank of England Andrew Bailey said: “It is going to have an impact clearly. That is part of the transmission of monetary policy, no question about that.
“What we are seeking to do here is balance having the transmission of monetary policy with – the two things that I would emphasise – the resilience of the banking system, and the ability to support customers and therefore manage the consequences of this.
“But there will be consequences from increased interest rates I’m afraid because that, from a monetary policy perspective, is why we have to do it.”
How does this compare to previous economic downturns?
The report stated that the proportion of income people spend on mortgage payments “should remain below the peaks experienced in the global financial crisis and in the early 90s”.
The Bank of England said the number of households with “high debt-service ratios” – meaning they have borrowed more money than they can easily pay back – has increased, and will continue to do so in 2023.
But added: “It is projected to remain some way below the historic peak reached in 2007.”
The annual stress test found that major UK banks are “resilient” against a scenario involving persistently high inflation, rising global interest rates, deep recessions in the UK and higher unemployment.