The Bank of England (BoE) has warned that nearly one million households in the UK will face a significant increase in mortgage payments by the end of 2026. This comes as the BoE has been raising interest rates in an attempt to combat high inflation. The central bank stated in a report that mortgage holders may struggle with repayments as fixed-rate deals expire and people renew their loans. However, the BoE also assured that lenders have sufficient strength to withstand a rise in customer defaults.
The average rate on a two-year fixed mortgage reached a 15-year high of 6.7% on Wednesday, driven by expectations of further rate hikes. The BoE’s Financial Stability Report, released twice a year, highlights that over two million households will experience an increase in mortgage payments between £200 and £499 per month by the end of 2026. Additionally, approximately one million mortgage holders can expect their monthly payments to rise by at least £500.
The report reflects the concerns of individuals like Craig Johnston, a homeowner from Sheffield, who stated that his mortgage payments would effectively double from £679 per month in 2021 to £1,209 by the end of September. He expressed his dissatisfaction with the situation and questioned the logic behind raising interest rates, particularly regarding the impact on homeowners, taxpayers, and renters.
While Chancellor Jeremy Hunt stated in June that the BoE had no alternative but to raise rates, Labour’s Shadow Chancellor Rachel Reeves criticised the high mortgage repayments as a “painful hit on families from the Tory mortgage bombshell.” Raising interest rates aims to reduce borrowing and subsequently decrease spending, which should help slow the rate of inflation. However, the BoE has faced criticism for its perceived delay in taking action to control inflation.
The report acknowledges that most mortgages in recent years have been fixed-rate deals for two or five years, resulting in a time lag before recent rate increases impact households. As a result, around 4.5 million homes have already faced higher mortgage repayments since late 2021, and the majority of remaining households are expected to experience the same by the end of 2026.
Although higher rates lead to reduced spending by households and businesses, potentially worsening the economic environment and increasing the risk of loan defaults, the BoE emphasised that banks are prepared to support customers facing payment difficulties. Stricter lending rules since 2014 have also played a role in limiting the amount of mortgage debt.
BoE Governor Andrew Bailey noted that the employment market is much stronger, which has helped alleviate stress for households. While the unemployment rate in the UK has slightly increased, it remains relatively low at 4%. However, Bailey acknowledged that wage increases, influenced by a robust labour market, contribute to sustained high inflation.
The BoE’s report indicates that although the proportion of income spent by UK households on mortgage payments is expected to rise, it is projected to remain below the peaks witnessed during the global financial crisis and the early 1990s. The bank assured that UK banks are well-positioned to support customers facing payment difficulties, reducing the likelihood of defaults compared to previous periods of pressure.
The report also included the results of a stress test on the UK’s eight largest banks and building societies. These institutions, including Barclays, Lloyds, HSBC, NatWest, Santander UK, Standard Chartered, Nationwide Building Society, and Virgin Money, were assessed for their ability to withstand catastrophic economic conditions, such as a 31% drop in house prices, an 8.5% unemployment rate, and 17% inflation.
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