More than five million UK households are now expected to face higher mortgage repayments when they refinance over the next two years, according to the Bank of England’s latest Financial Stability Report.
The Bank estimates that just over five million borrowers will see their monthly repayments rise by the end of 2028, compared with its previous projection of nearly four million published in December. It attributes the change to higher mortgage rates following increased market interest rates linked to the conflict in the Middle East.
The report notes that the average rate on a two-year fixed 90% loan-to-value mortgage has increased to 5.32%, around 75 basis points higher than at the time of the Bank’s December Financial Stability Report.
According to the Bank, around 750,000 households due to refinance by the end of this year after taking out mortgages before 2022 are expected to experience the largest increases in repayments.
The updated projections come as lenders continue to adjust mortgage pricing in response to changes in wholesale funding costs and market expectations for interest rates. Despite the increase in refinancing costs for many borrowers, the Bank said the UK financial system remains resilient overall.
Many of the affected households are coming to the end of fixed-rate mortgage deals secured when borrowing costs were below 3%, leaving them facing significantly higher monthly repayments when they refinance.
The Bank of England said higher market interest rates have increased the cost of new mortgage lending, resulting in more borrowers being exposed to higher repayments over the next two years.
Elsewhere in its Financial Stability Report, the Bank also highlighted potential risks to global financial markets. It warned that increased borrowing by hedge funds to invest in artificial intelligence-related stocks has contributed to rising market valuations and could amplify risks if investor sentiment were to deteriorate.
“There has been a significant rise in hedge fund leverage in equity markets, creating risks.”
The Bank also outlined proposals to reduce some regulatory requirements for the UK’s largest lenders as part of a wider review of the financial system.
Under the plans, systemically important banks would be allowed greater flexibility to use their capital buffers during periods of market stress before rebuilding them over time.
The Bank of England is also consulting on changes to capital rules that could allow major lenders to hold slightly lower levels of capital against their lending, with the aim of increasing their capacity to support households and businesses.
The proposals form part of broader efforts to simplify post-financial crisis regulation while maintaining the resilience of the UK banking system, the Bank said.