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)..
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
Stop inheritance tax perk on pensions, says IFSThe government could raise billions of pounds in revenue by closing inheritance tax loopholes, such as on pensions and AIM shares. Is your pension at risk?
-
Revealed: Best buy-to-let property hotspots in the UKLooking for the best buy-to-let property locations in the UK? We reveal the top 10 postcodes with the strongest rental returns
-
Act now to bag NatWest-owned Ulster Bank's 5.2% easy access savings accountUlster Bank is offering savers the chance to earn 5.2% on their cash savings, but you need to act fast as easy access rates are falling. We have all the details
-
Moneybox raises market-leading cash ISA to 5%Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
-
October NS&I Premium Bonds winners - check now to see what you wonNS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
-
October’s NS&I Premium Bond winners revealed - have you scooped £1 million?Two lucky NS&I Premium Bond winners are now millionaires this October. Find out here you are one of them
-
The best packaged bank accountsAdvice Packaged bank accounts can offer great value with useful additional perks – but get it wrong and you could be out of pocket
-
Bank of Baroda closes doors to UK retail bankingAfter almost 70 years of operating in the UK, one of India’s largest bank is shutting up shop in the UK retail banking market. We explain everything you need to know if you have savings or a current account with Bank of Baroda
-
The best options to earn cashback on spendingFrom credit cards and current accounts to cashback websites, there are plenty of ways to earn cashback on the money you spend.
-
Should you retire abroad?Check the regulations governing pension savings carefully before you decide to retire abroad.
