Rising living costs and interest rates are stretching household finances. Inflation is currently elevated, especially for essentials such as energy and food.
To curb inflation, the monetary policy committee has been raising bank rate, which means that many households will face higher borrowing costs on their mortgage.
Higher mortgage rates and rising costs of living make it harder for mortgagors to afford their mortgage repayments. This could cause some households to default, or cut back sharply on their spending, posing a risk to financial stability.
The BoE assesses this risk by calculating the share of households in the UK with high mortgage debt burdens, measured by cost of living-adjusted mortgage debt-servicing ratios (COLA-DSRs).
COLA-DSRs are constructed by dividing a household’s debt repayments by their income, adjusted for taxes and costs of essentials. COLA-DSRs above 70 per cent are considered high, as households with COLA-DSRs above 70 per cent are more likely to default or cut back sharply on spending.
The share of households with high mortgage debt burdens has increased over 2022 H2. The share is projected to increase further over 2023 to 2.4 per cent, or around 670,000 households, approaching levels comparable to the start of the global financial crisis.
Higher mortgage rates and inflation are the largest drivers of the projected increase in the share of households with high mortgage debt burdens. Around 4mn households will be exposed to rate rises over 2023.
This number includes those on variable rates and those coming to the end of fixed rate products during this period.
The majority of the inflation impact has been due to high energy and food price inflation.
Food and energy account for around half of households’ essential spending. Inflation for both of these has been higher than for most other essentials over 2022 and inflationary pressures are expected to remain strong over 2023.
Unemployment is also expected to increase over 2023, which will also make it harder for some households to repay their mortgage.
In contrast, higher nominal wages and government support measures, including the energy price guarantee and cost of living payments are expected to have a mitigating effect.
Nevertheless, the share of UK households who could struggle to afford their mortgage payments is expected to increase over 2023.
