Mortgage rates: UK households will face major mortgage payment increases in next two years - Bank of England

• Around 3 million UK households will see mortgage payments rise, with 400,000 facing increases over 50%
• Bank of England says UK lenders are still capable of supporting households and businesses
• Mortgage rates have increased since 2022, with current interest rates at a 16-year high of 5.25%
• Households paying below 3% interest are likely to experience higher payments by 2026
• Rising rates have led to reduced savings and financial strain among renters and low-income households

The Bank of England has said that approximately three million households in the UK will experience increases in their mortgage payments over the next two years.

This will include significant rises of over 50% for about 400,000 households, according to the Bank’s Financial Policy Committee (FPC).

Despite this, the central bank said that UK lenders remain capable of supporting households and businesses effectively, even in the event of a deteriorating economic environment.

The Bank’s most recent Financial Stability Report indicated that the majority of households have already seen their mortgage rates rise since borrowing costs started increasing notably in 2022.

Interest rates are at a 16-year-high of 5.25%, with the central bank voting to maintain the figure for a seventh consecutive meeting earlier this month. But many economists have predicted they could reduce rates at the next vote in August.

Currently, about 35% of households in the UK that have mortgages - more than three million of them - are paying interest rates below 3%. These households are likely to see their mortgage payments go up by the end of 2026.

If a typical household currently has a fixed-rate mortgage that ends before the end of 2026, they can expect their monthly mortgage payment to increase by about £180.

The central bank said that an “increasing proportion” of households have been choosing to borrow over a longer period of time, reducing monthly repayments but leaving them with more debt to service over time.

Higher mortgage rates have resulted in many households and renters reducing their savings, the Bank found.

It added that the share of renters falling behind on payment increased to 16.5% in the first quarter of 2024, compared with 15.7% a year ago, after significant increases in rents year-on-year.

Survey data also found that “many renters and low-income households intend to run down their savings even further” in the next year to deal with the increased cost of living. The central bank stressed that, despite pressure on household finances, the overall risk environment for the economy and financial sector is broadly unchanged.

The banking sector “has the capacity to support households and businesses even if economic and financial conditions were to be substantially worse than expected”, according to the FPC.

But there are “global vulnerabilities” for the sector, including “policy uncertainty” associated with upcoming elections across the world, including in the UK, the US and France in the coming months.

Financial markets also face the risk of a “sharp correction” to asset prices, which have risen sharply in recent years. The report highlighted that high inflation or geopolitical changes could trigger a sell-off which could impact prices.

“Investors in financial markets are continuing to expect the economy to recover and inflation to fall,” the FPC said.

“They are placing less weight on risks, such as geopolitical developments or continued high inflation, that might cause weaker growth or interest rates to stay higher than expected.

“These 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.”

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