Millions of homeowners face £250 jump in monthly mortgage payments next year

The Bank of England has warned that homeowners and buy-to-let investors will need to pay thousands of pounds in extra mortgage payments next year. We explain what help is available if you’re worried about rising mortgage costs.

Couple doing paperwork
Rising mortgage costs could cause financial difficulties for 220,000 households
(Image credit: © Alamy)

The Bank of England has warned that about four million mortgage borrowers face a £250 jump in their average monthly payments next year, as a result of rising interest rates.

A typical customer with a fixed-rate mortgage that expires within the next 12 months could see their average monthly payment rise from £750 to £1,000, as they are forced to remortgage onto a higher rate, according to the Bank’s Financial Stability Report.

The Bank of England base rate is currently 3%, but it is likely to rise to 3.5% or 3.75% tomorrow (15 December 2022)..

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The report said buy-to-let investors were particularly vulnerable, as many buy-to-let mortgages are interest-only.

Andrew Bailey, governor of the Bank of England, said: "Falling real incomes, increase in mortgage costs and higher unemployment will place significant pressure on household finances and weigh on their ability to service debt.”

Jon Halbert, mortgage and protection adviser at Key Financial Associates, added: “The rising cost of borrowing will force a growing number of homeowners to sell because their affordability on the new rates when they come to remortgage, coupled with the cost of living, will become impossible. Repossessions will also increase as a result of recent rate rises."

However, the Bank of England stressed that both banks and homeowners were more resilient to weather the storm next year, compared to previous crises.

It said mortgage lenders have strong balance sheets and are required by regulation to support struggling customers.

Meanwhile, households are more resilient now than in the run-up to the financial crisis in 2007 and the recession in the early 1990s, as they have less debt and the proportion of disposable income spent on mortgages remains below peak levels.

We look at what the Bank of England report said, and how to get help if you’re struggling with rising mortgage costs.

What did the Bank of England’s report say?

The Bank's Financial Stability Report said that as well as four million mortgage borrowers facing higher payments next year, the rising cost of mortgages would cause severe financial difficulties for another 220,000 households.

However, it added that despite the increased pressure on households, this is not expected to “challenge the resilience of UK banks, which will be well equipped to support lending”.

The report said: “Major UK banks’ and building societies’ capital and liquidity positions remain strong and pre-provision profitability has increased.

“They are therefore well-placed to absorb shocks and continue meeting the credit needs of households and businesses.”

Bailey also said he believes there will be fewer home repossessions than seen in previous financial crises due to greater support from lenders.

Households will be more resilient compared to previous crises, partly because while the proportion of disposable income spent on mortgages is projected to rise, it will remain below the levels seen during the global financial crisis and the 1990s recession.

Having said that, the number of people falling into arrears is set to rise next year, the report found.

“Many households will find it challenging to manage higher interest rates alongside the ongoing rises in the cost of essentials, and pressure on UK households will increase.

“As household debt-servicing burdens continue to rise over the next year, arrears and defaults are likely to rise.”

What about buy-to-let investors?

There are two million buy-to-let mortgages outstanding, which is around 8% of the housing stock, according to the Bank of England report.

It said that buy-to-let mortgagors are particularly sensitive to interest rate rises as around 85% of buy-to-let mortgages issued by major UK banks are interest-only, “so tighter financial conditions have a greater proportional impact”.

By the end of 2023, monthly repayments for buy-to-let investors are forecast to rise on average by around £175, and around 20% of customers will face increases of over £300.

The Bank warned that landlords would either raise rents for tenants or sell off their properties, causing a deeper fall in house prices.

Stress-testing pension funds

The report also announced that it will launch the first ever stress test on the non-bank sector in 2023 following the recent mini-Budget market turmoil which saw the near-collapse of some defined benefit pension funds.

It said more work needs to be done to prevent non-banks - such as pension schemes and liability-driven investment (LDI) funds - posing a risk to UK financial stability.

How to get help with mortgage costs

If you’re struggling to make your mortgage payments, the first thing to do is to speak to your lender. They may be able to grant you a temporary payment holiday, lengthen the term of your mortgage - which will lower the monthly payments - or switch your loan to interest-only repayments.

You might also be able to switch to a cheaper mortgage deal, especially if you’re on an expensive standard variable rate (SVR). By changing to a fixed-rate mortgage, you could potentially reduce your monthly payments.

Lenders are required by law to support struggling customers, and many have specialist support teams who can help.

If you have mortgage payment protection insurance, you may be able to claim on this to cover your mortgage costs. This is relevant if you’ve lost your job or are unable to work due to an accident or sickness.

You’ll need to check the terms and conditions of your policy to see if you’re covered (the policy could be with your lender, or an insurance provider).

The government’s Support for Mortgage Interest scheme could also help - although there is a strict criteria to qualify. You usually need to be on benefits such as Universal Credit, pension credit, income support or employment and support allowance.

Support for Mortgage Interest is a government loan that helps with mortgage interest payments, which you’ll need to repay with interest when you sell or transfer ownership of your home.

Ruth Emery

Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. 

A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. 

Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.