More than a third – 35% – of all mortgage accounts are still paying interest rates of less than 3%, the central bank found.
In its Financial Stability Report, the Bank of England’s Financial Policy Committee (FPC) said this equated to three million mortgage holders.
It added that while most fixed rate mortgage pricing had risen since the second half of 2021, the full impact had not yet been passed through to all mortgagors. The FPC said the majority of these people would see their fixed rate expire before the end of 2026.
For the average homeowner coming off a fixed rate between June this year and the end of 2026, the monthly mortgage payments are predicted to rise by around 28% or £180.
The FPC said within this, a small share of around 400,000 households would see “very large increases” in their payments, with a jump of 50% or more.
The FPC said expectations for the base rate to fall in the latter half of this year should ease some of that pressure, particularly for variable rate mortgagors, who account for around 18% of all mortgages.
A growing number of fixed rate mortgage payers who are already on higher rates should be able to refinance at a lower rate in the next two years, if current market pricing is correct.
Households resilient to higher interest rates
The FPC said although debt-servicing ratios (DSRs) were increasing, mortgagors were expected to be able to withstand higher interest rates, especially if unemployment remains low.
DSRs relate to how much income is spent servicing mortgage debt.
The share of income spent on mortgage repayments will rise, but to a lesser extent, the FPC projected.
It said the average DSR would still be “well below” levels seen during the 2008 global financial crisis and the early 1990s recession.
Its report said borrowing rates would have to rise by 400-500 basis points for DSRs to reach the same levels as the global financial crisis.
However, the share of households with high mortgage DSRs is expected to rise slightly over the next two years.
The FPC predicted this would increase from a share of 1.5% of households in Q1 this year to 1.6% by Q4 2025.
The FPC said these households had seen their savings cushions fall in the last year, making them more vulnerable to shocks than households that have boosted their savings.
However, the proportion of vulnerable households will still be below that seen before the global financial crisis, if unemployment stays low.
The FPC found that mortgage arrears had stayed broadly flat since its December report, reaching around 1.1% in Q1. It said this was low by historical standards, and wage growth alongside low unemployment was stopping this from increasing.
Arrears are expected to rise further, but still below the 4% peak of the 1990s recession and the 2.4% high after the global financial crisis. This is despite interest rates rising by more than previous monetary tightening cycles.
Financial pressures on renters and low-income households
Although households are expected to be resilient to financial pressures in the main, savings buffers for renters and low-income households had been “further eroded” in the six months to Q1 2024.
But pressures on renters and lower-income households continue.
The central bank’s NMG survey found the share of renters who had fallen behind on payments rose from 15.7% in Q1 2023 to 16.5% this year.
It also found that those renting or in lower-income households were more likely to dip into savings to deal with the increased cost of living.
UK banking system able to cope with stressors
The Financial Stability Report suggested the UK’s banking system was able to support households and businesses even if the economy worsened.
The FPC said banks had enough resources, such as liquidity, to absorb any potential losses.
