Expected Mortgage Cost Lower for Some Amid Challenging Financial Outlook

A general view of the Bank of England in London on Sept. 21, 2023. Aaron Chown/PA Wire

The share of UK households spending a high proportion of their income on mortgage payments is expected to be lower than previously thought, the Bank of England (BoE) said, amid an overall challenging financial outlook for borrowers.

Nearly half a million households will spend more than 70 percent of their income, after tax, by the end of 2023. This constitutes a decrease from the previously estimated 650,000 households.

The slight drop comes amid growth in household income since July. The figures were published in a report by the bank’s Financial Policy Committee (FPC) that reviews the stability of the UK financial system.

At the same time, the bank warned that increased living costs and higher interest rates are yet to be reflected in higher mortgage payments. This means stretched household finances for many borrowers.

Just under 900,000 households will face a payment increase by more than £500 a month owing to higher interest rates. The bank also estimated around 20 percent will see a jump of more than £1,000 per month.

Given that the median disposable income for UK households is £32,000 per year and slightly over £2,000 per month, the expected jumps could have a considerable impact on people’s finances. Many households could struggle to afford existing mortgages or take out a new one.

The FPC warned that almost 5 million UK homeowners will see their repayments increase over the next three years. Rising interest rates heightening risks in the global financial markets are to blame, the BoE said.

More than 5 million households brokered a new fixed-rate deal since interest rates started rising in late 2021. However, a further 5 million homeowners will still see higher costs by the end of 2026, the FPC said.

The BoE has been consecutively raising interest rates in the past two years, before pausing the trend in September, with the rate currently standing at 5.25 percent.

The last meeting for this year of the bank’s Monetary Policy Committee, which sets the interest rate, will take place next week. But economists expect a first rate cut no sooner than late 2024.

Lat month, BoE Governor Andrew Bailey warned that it was “much too early” to think about cutting rates. He added that the BoE will watch “closely to see if further rate increases are needed.”

Falling Into Arrears

Higher rates led to an increase in the overall share of households who are behind in paying their mortgages, the FPC said. The number of homeowners falling into arrears was in the residential and buy-to-let sectors, said Mr. Bailey.

He added, however, that the numbers remained low by historical standards, and still “well below” peak levels in 2008.

“While the full effect of higher interest rates have yet to come through, borrowers on the whole have been resilient to these changes,” the governor said.

Even with some households and businesses falling behind or unable to make their payments, the UK banking system “has large capital buffers and other resources to absorb any potential losses, or outflows of cash,” the report said.

“UK banks are strong enough to support households and businesses, even if economic and financial conditions are worse than expected,” the FPC stated.

The bank recognised that there are “those that are more adversely affected.”

Some businesses are likely to struggle more with borrowing costs, including those in parts of the economy most exposed to a slowdown or with a large amount of debt, the FPC said.

The report said that many businesses will not have to renew their fixed-rate loans or other debt before 2025. This, according to the FPC, will give them more time to manage their budgets in accordance with higher borrowing costs.