The Bank of England warned that millions of UK mortgage holders will soon see their borrowing costs increase.
Rightmove reported that the central bank stated more than 3mn home owners still pay interest rates below 3 percent, while Rightmove said the average rate for homeowners is currently above 5 percent.
By the end of 2026, most of those who are still paying lower rates will have their deals expire. The BoE stated that a typical borrower who’s fixed-rate agreement expires in 2026 would pay £180 extra each month. This is an increase of around 28 percent.
The company said that payments for around 400,000 homes, which it called “a relatively small percentage”, would increase by 50% or more.
The BoE stated that the full impact of increased interest rates had not yet been felt by all mortgage holders.
The central bank’s warning, in its financial stability report, one week before the UK General Election, highlights the financial challenges facing British households. This is even though markets are expecting the BoE to start cutting rates this summer.
The central bank stated that if rates of interest began to decline, it would reduce the pressure on household refinancing and boost the small minority of borrowers with variable rates.
Many more borrowers, however, will be affected by refinancing at a higher interest rate even though benchmark rates are falling from their 16-year high.
In anticipation of a lower BoE base interest rate, some banks have begun reducing rates in this week. High street lenders are competing to attract fewer homebuyers.
The UK has a disproportionately high number of short-term fixed-rate agreements, which lock in borrowing rates for a period of two to five years. This can cause shocks in households when interest rates rise after the expiration date.
The BoE stated that mortgage defaults were “low historically”, with only 1.1 percent of mortgage holders who are owner-occupiers in arrears. This is the same as the rate six months ago. Since the global financial crash, lending regulations have been tightened. This has led to fewer borrowers being underwater.
The central bank warned that the financial pressures on lower-income and renter households were uneven. The central bank said that while the overall position of households appears resilient, financial pressures due to higher interest rates and rising living costs will continue and be concentrated on a subset.
BoE warned tenants about the financial strain caused by record rents and higher mortgage costs. According to surveys, many renters plan to “run down their savings” even more this year in order to keep up with the rising cost of living.
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