Millions of households in the UK are set to experience an increase in their mortgage repayments over the next two years, according to the Bank of England. The financial policy committee has predicted that around 400,000 homes could see “very large increases” of more than 50%.
The rise in interest rates, which have reached a near two-decade high of 5.25%, is part of the Bank’s efforts to control the rising cost of living crisis. This has led to inflation, the pace of price rises, reaching a 40-year high. However, the Bank’s target of 2% has now been met due to the higher interest rates making borrowing more expensive and limiting spending.
Despite the increase in the base interest rate, the financial policy committee has revealed that over a third of mortgage holders (35%) are still paying a rate of less than 3%. This is because they signed up for a deal before the energy price shocks caused by the war in Ukraine. However, once these deals expire, households will have to sign up for more expensive mortgage products.
The report also stated that most mortgage holders have already repriced since the cycle of interest rate increases began in late 2021. However, for a typical household coming off a fixed-rate mortgage before the end of 2026, an increase of around £180 per month is expected.
As the UK’s financial system could potentially face economic shocks and risks, it is the responsibility of the financial policy committee to ensure its stability. The committee stated that UK lenders are currently in a strong position to support homes and businesses, even in the event of a worsening economy.
While interest rates are expected to decrease in the coming months, with cuts forecast for August, September, November, and December, consumers have been warned not to expect a return to the era of ultra-low interest rates. The chief executive of the UK’s largest lender, Charlie Nunn, told reporters that the new normal for mortgage rates is between 3.5% and 4.5%.