Monthly mortgage repayments will rise by £500 for nearly one million households, the Bank of England has found.
Major UK banks are strong enough to handle a severe economic downturn, but small businesses and households are being squeezed by higher interest rates and living costs, it revealed.
The central bank’s stress test found that eight of Britain’s biggest lenders are “resilient” in the face of some of the most extreme economic conditions.
It means it thinks they can handle a scenario involving persistently high inflation, rising global interest rates, deep recessions in the UK and higher unemployment.
But households and businesses are coming under pressure from higher borrowing costs, the Bank found in its latest Financial Stability Report.
The impact of higher interest rates is gradually hitting homeowners who have a fixed-rate mortgage deal, typically for two or five years.
The average household will see their monthly interest payments go up by about £220 if they are refinancing during the second half of this year and see their rate go up by about 3.25 percentage points.
Nearly a million people could see repayments soar by £500 a month by the end of 2026, while less than half a million could face a monthly jump of more than £750.
Some four million fixed-rate mortgage holders are still set to face a hike in borrowing costs between now and the end of 2026.
Buy-to-let landlords are also being impacted by higher mortgage rates, which has caused some to sell up or pass on higher costs to renters, the Bank found.
The Bank said in its report: “Although the proportion of income that UK households overall spend on mortgage payments is expected to rise, it should remain below the peaks experienced in the global financial crisis and in the early 1990s.
“UK banks are in a strong position to support customers who are facing payment difficulties. This should mean lower defaults than in previous periods in which borrowers have been under pressure.”
Andrew Bailey, Governor of the Bank of England, said: “It is going to have an impact clearly… that is part of the transmission of monetary policy, no question about that.
“What we are seeking to do here… is balance having the transmission of monetary policy with – the two things that I would emphasise – the resilience of the banking system, and the ability to support customers and therefore manage the consequences of this.
“But there will be consequences from increased interest rates I’m afraid because that, from a monetary policy perspective, is why we have to do it.”
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