The number of households cutting back on spending as a result of higher mortgage payments will not reach the level seen in 2007, the Bank of England has said.
In the central bank’s latest financial policy committee report, published today (July 12), the bank said an increase in interest rates makes households and businesses borrowers more likely to cut back on spending, negatively impacting the economy and risking default.
More households are being affected by higher interest rates as fixed-rate mortgage deals expire, but the proportion of households with “high debt service ratios” will remain “some way below” the historic peak in 2007, the bank said.
Despite this, it said that nearly 1mn mortgage holders could see their monthly repayments increase by about £500 a month by the end of 2026.
Mortgage rates have been climbing since high inflation led the Bank of England to hike rates at speed, with the lowest rates on the market currently at 5.46 per cent.
Yesterday (July 11), the average two-year fixed mortgage rate hit 6.6 per cent, the highest it has been in 15 years and exceeding its peak after Liz Truss’ 2022 "mini" Budget.
According to Moneyfacts, the average two-year fixed rate rose to 6.66 per cent, meaning homeowners with a £200,000 loan over 25 years, whose deals are coming to an end, could face monthly bills which are £400 higher.
The BoE said several factors will limit the damage on households from rising rates.
The first is that banks can afford to offer forbearance and limit the increase in repayments given the “robust capital and profitability” of the banks, as well as stricter regulatory conduct standards for lenders.
Secondly, the Financial Policy Committee’s mortgage market measures, introduced in 2014, have limited the build up of debt in the mortgage market, increasing the resilience of borrowers.
The BoE said the overall number of mortgages in arrears rose slightly in the first quarter of the year, but remained low by historical standards.
“It will take time for the full impact of higher interest rates to come through,” it warned.
Hargreaves Lansdown previously warned that those on fixed rate mortgages could face “catastrophe” when their deals come to an end, with half of individuals on fixed rate mortgages not feeling the brunt of the raises yet.
Some 1.3mn fixed rate deals are due to come to an end this year, according to the Office for National Statistics, most of which were fixed at under 2 per cent.
sally.hickey@ft.com
