As many as three million households are set to experience more financial pain as their mortgage payments rise in the next two years, the Bank of England has warned.
And about 400,000 mortgage holders are facing some “very large” payment increases, the Bank’s Financial Stability report cautioned.
Monthly mortgage payments are expected to rise by 50 per cent as fixed-rate deals end between now and December 2026.
The report estimated that three million mortgage holders are still on fixed rates of below 3 per cent and are set to see their payments jump over the next two years.
A typical household rolling off a fixed-rate mortgage before the end of 2026 is due to face a rise of about £180 a month.
However, the Bank said that overall risks to the UK financial system were broadly unchanged, and businesses and households have remained resilient to the impact of higher rates.
Renters remain under pressure from the higher cost of living and higher interest rates, it added.
Rising rents are leading to more renters falling behind on payments with non-payment rates rising to 16.5 per cent in the first quarter, compared with 15.7 per cent a year ago.
Bank surveys also showed renters and low-income households intend to run down their savings even further in the next year to cope with the increased cost of living.
More households were opting to borrow over a longer period of time, reducing monthly repayments but leaving them with greater debt to service over time.
Higher interest rates mean that many people were reducing their savings, the report said.
Despite pressure on household finances, the number of people struggling to pay a mortgage is expected to remain below levels in the wake of the 2008 global financial crisis.
Uncertainty caused by a wave of elections around the world, which begin in France this weekend, might destabilise the UK’s financial system, the Bank warned.
If bond investors bail out of France if Marine Le Pen’s National Rally party is victorious, shock waves could affect wider financial markets. Investors are “putting less weight on risks, such as geopolitical developments or continued high inflation”, it said.
Such risks “make it more likely that there could be a sharp correction in asset prices that could ultimately make it more costly and difficult for UK households and businesses to borrow”.
Karim Haji, Global and UK Head of Financial Services at KPMG, said: “While there are signs that a brighter economic outlook is starting to feed through to resilient consumers and businesses, the Bank of England’s report shows high borrowing costs still pose a threat to the stability of the financial system. The good news is UK banks are in rude health, with strong capital and liquidity positions allowing them to support people even if the economy does worse than expected. It is incumbent on them to continue supporting vulnerable customers.”
