BoE: Millions of mortgage borrowers will be hit with higher repayments next year

Higher interest rates are yet to fully hit households and monthly mortgage repayments will rise between £200 and £1,000 – how much will your home loan go up by?

House model on pile of coins
(Image credit: Getty Images)

High interest rates are yet to fully hit households, the Bank of England (BoE) has warned, with millions of mortgage borrowers set to pay between £200 and £1,000 extra for their home loan per month by the end of 2024.

The BoE’s latest Financial Stability Report said while interest rates may have peaked, they are still likely to remain higher for longer.

Millions of borrowers have already felt the impact of higher interest rates, with 5m households seeing their home loan repriced higher when they remortgaged.

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It comes as interest rates have soared since December 2021 from 0.1% to 5.25% currently, while average mortgage pricing went above 6% earlier this year.

Mortgage rates have started to fall and interest rates have been held in recent months, while house prices appear to be growing again on a monthly basis.

But the average two-year fixed rate is now at 6% and the typical five-year deal is at 5.61% compared with pricing ranging from 1% to 2% back in 2021.

It is these changes and the wider cost of living crisis that the BoE says millions of households are yet to face.

“Household finances remain stretched by increased living costs and higher interest rates, some of which has yet to be reflected in higher mortgage repayments,” says the BoE.

How higher mortgage rates will hit homeowners

Average mortgage rates may be dropping but the BoE highlights that they remain higher than in recent years.

Higher rates are expected to hit 5 million households by 2026, the BoE says, adding around £240 to monthly mortgage repayments on a typical home loan.

Almost 500,000 borrowers will see up to £200 added to their monthly mortgage repayments by the end of 2024, according to the BoE, while 400,000 will be paying an extra £300. 

Around 200,000 will be paying between £500 and £750 more, while 100,000 will see their monthly repayments rise by more than £1,000 per month, according to BoE estimates.

The increases mean the proportion of post-tax income spent on mortgage payments across households is projected to increase from 6.8% in the second quarter of 2023 to almost 9% by the end of 2026.

This is still below the peaks seen during the global financial crisis and the 1990s recession, the BoE says.

Landlords are also facing higher costs, the BoE said, due to higher interest rates on buy-to-let mortgages.

These costs are being passed on to tenants, with new rents up 10.5% annually in September and by 6.1% in October.

How to prepare for higher mortgage repayments

Banks have agreed to a Mortgage Charter from the Treasury on how to treat customers facing difficulties during the cost of living crisis.

This includes letting borrowers switch to an interest-only basis or extend their mortgage term.

There are risks though as paying by interest only means there will be a large chunk of repayments to pay-off at the end of a deal while extending the term will be more expensive in the long-run.

Michelle Lawson, director at Lawson Financial, says most people are aware that mortgage rates have increased over the past 18mths or so unless they have been sleeping.

“There will be people who will sadly not be in a position to afford their new mortgage payments however, most have had the opportunity to try and adapt their finances before their mortgage product comes to an end,” she says.

“The stress testing has worked on these applicants as majority can pay, the hardest thing is accepting the increased costs in a world where everything has gone up.

“Consumers should take advice from a good broker to ensure they are looking at all possible avenues and importantly, rates have come down from where they were and long may this continue.”

Peter Stamford, director at The Mortgage Uni, says he is nudging homeowners to tighten their belts, looking at everything from Netflix to credit cards. Debt consolidation's becoming a hot topic, helping people manage not just mortgages but living costs too.

“Stay sharp, maybe overpay if you can, and always, always chat with a broker,” he says.

“Rates are a bit of a rollercoaster, but being prepared and proactive is key.”

Marc Shoffman
Contributing editor

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.