Bank of England warns homeowners of mortgage pain to come

Millions of UK mortgage holders have yet to feel the pain of higher interest rates and will see their borrowing costs rise in the next two and a half years, the Bank of England has warned. 

The central bank said more than 3mn homeowners were still paying interest rates of less than 3 per cent, while the current average rate is above 5 per cent, according to Rightmove. 

Most of those still on cheaper rates will see those deals finish by the end of 2026. A typical borrower whose fixed-rate deal will expire in that time would pay £180 more each month, an increase of about 28 per cent, the BoE said. 

It added that for around 400,000 households — which it termed “a relatively small proportion” — payments would go up by 50 per cent or more.

“The full impact of higher interest rates has not yet passed through to all mortgagors,” the BoE said. 

The warning in the central bank’s financial stability report, a week before the UK general election, underscores the financial headwinds for British households, even as markets expect that the BoE will start to cut rates over the summer.

The central bank said that if interest rates started to fall, this would offset refinancing pressure on households and give a boost to the minority of borrowers on variable rates. 

But many more borrowers will feel the pinch from refinancing to a higher rate, even as benchmark rates decline from their current 16-year high. 

Some banks, including Barclays and HSBC, have started cutting rates this week in anticipation of the BoE base rate coming down, as high street lenders compete to win business for a limited pool of homebuyers. 

Short fixed-rate deals, which lock in borrowing costs for two or five years, are unusually dominant in the UK market compared with in other countries, creating sudden shocks for households if interest rates are higher when those deals expire. 

However, the BoE said mortgage defaults remained “low in historical terms”, with just 1.1 per cent of owner-occupier mortgage holders in arrears, the same rate as six months earlier. Tighter lending rules since the global financial crisis have meant fewer borrowers finding themselves underwater. 

The central bank also warned that financial pressures were falling unevenly on renters and lower-income households. “While the position of households in aggregate appears to be resilient, pressures associated with continued higher interest rates and living costs continue and will be concentrated in a subset of households,” it said. 

The BoE has previously warned about higher mortgage costs for landlords, and a scarcity of rental properties, leading to record rents straining tenants’ finances. Surveys suggest many renters “intend to run down their savings even further” this year to cope with the cost of living.