Around 3.9 million households, or 43% of mortgage accounts, will refinance onto higher rates and face a rise in repayments, a report from the central bank said.
The Bank of England Financial Policy Committee’s (FPC’s) Financial Stability Report for December said this was because the impact of higher interest rates had not yet passed through to all mortgagors.
The committee predicted that the average homeowner coming off a fixed rate in the next two years would see their mortgage repayments increase by 8% or £64, and some could face larger rises.
On the other hand, around three million households – or a third of mortgage borrowers – should see their payments decrease in the next three years.
The FPC said many mortgage borrowers had refixed onto higher rates since interest rates began to rise in late 2021, and previous and expected cuts to interest rates would result in lower payments for borrowers on variable terms and people fixed above prevailing rates.
The number of people expected to benefit from lower mortgage payments was slightly higher than the two-and-a-half million forecast in the committee’s July report.
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High-LTI lending rises amid policy changes
The FPC said it was too soon to assess the impact of recent lending policy changes on the mortgage market, but many mortgage lenders had changed their behaviour in response.
It said median stress rates fell by around 100 basis points from Q1 to Q3, and the central bank’s latest Credit Conditions Survey suggested there was a higher supply of credit available to households.
The share of high-loan-to-income (LTI) lending rose to 9.5% in Q3, in line with Q1 and up from 7.6% in Q2.
It said the four-quarter rolling average was at 8.7%, below the regulatory 15% aggregate limit for high-LTI lending. The FPC said it would continue to assess the effect of policy changes on the housing market, stating that looser conditions would only address barriers to homeownership by increasing housing supply too.
The FPC said quoted mortgage rates were falling and the market was more competitive, resulting in an increase in mortgage lending. It said lending has risen 3.2% year-on-year, above the post-global financial crisis average of 2.2%.
Households still resilient to financial shocks
The FPC said households remained financially resilient, and it would take a notable fall in incomes and rise in interest rates for the debt burden to increase materially.
Its report showed that the aggregate debt to income ratio was low at 132% in Q2, and the share of household income spent on mortgage repayments was flat at 7.3%. This is expected to stay around this level over the next few years, and the FPC said the central bank believed it would take a “very severe shock to incomes and mortgage spreads” for the debt servicing ratio to reach historical highs.
The share of households with high mortgage debt servicing ratios, defined as above 40%, was 1.6% in Q3. The rate of mortgage arrears was 0.9%, both below peaks seen around the global financial crisis.
Around 6,100 homes were repossessed by banks by the end of Q3, compared to 4,200 last year. Still, the FPC said repossession rates were low by historical standards and represented 0.06% of all loans.