The mortgage payments of half of UK homeowners will rise over the next three years, leaving 4.4 million households facing extra pressure on their finances, the Bank of England has said.
The Bank’s financial policy committee said this would include £500-a-month increases for the mortgages of about 420,000 households.
The committee found that more than a third of borrowers – about 37% – had so far been shielded from rises to interest rates because they fixed their mortgages before increases began in the second half of 2021.
About 31% of all mortgage holders, or 2.7 million households, are expected to refinance on to a rate of more than 3% for the first time before the end of 2027.
That includes up to 1.5 million households, who will be forced to roll on to higher mortgages for a second time since interest rates started rising three years ago.
In its financial stability report, the Bank’s committee said this would lead to a 22% increase in monthly payments, on average, adding about £146 to the typical bill. However, that is slightly lower than previous forecasts in June, which had pointed to a £180 increase.
In total, the mortgage payments of 50% of mortgage holders will increase over the next three years, with 23% seeing no change and 27% experiencing a fall in payments.
Policymakers at the Bank announced a quarter-point cut in interest rates to 4.75% earlier this month, raising hopes that lower rates would ease the burden on households in the longer term.
However, the Bank warned that conditions for poorer households had worsened. “Pressure on renters and lower-income households continue. Savings buffers have decreased for lower-income households and the share of renters who have fallen behind on payments has risen slightly,” it said.
Separately, the Bank’s governor, Andrew Bailey, said uncertainty around the global economic outlook had increased. “Geopolitical risk remains elevated, and as we are an open economy with a large financial sector, these risks are particularly relevant to UK financial stability,” he said.
Policymakers also released the results of their first stress test into the shadow banking sector. It found that hedge funds, pension funds and other companies in the largely unregulated sector were at risk of amplifying market shocks and triggering a £17bn asset sell-off.
The exercise, the first in the world by a central bank, tracked how non-bank financial institutions – often referred to as the shadow banking sector – would react in a short and sharp shock affecting financial markets.
The stress test showed that in this scenario, companies would rapidly sell off as much as £17bn worth of assets, as they scrambled to recapitalise or limit their activities, in a way that would “amplify the shock”.
There are concerns that risks are emerging in the shadow banking sector that could echo the problems experienced in the financial sector in the run-up to the 2008 financial crisis.
The Bank’s regulatory arm, the Prudential Regulation Authority (PRA), said that while industry standards had increased the resilience of companies in some corners of the shadow banking industry – including insurers, money market funds and liability-driven investing funds – a lack of regulation meant that resilience was shaky and could deteriorate over time.
Shadow banking refers to financial firms that face little to no regulation compared with traditional lenders, and includes businesses such as hedge funds, private credit and private equity funds.
More than 50 City institutions took part in the exercise, including insurers, clearing houses, asset managers, pension fundsand hedge funds.
The PRA said it would start paring back its annual banking stress tests, which were introduced in 2015 to check if banks would be able to withstand a major shock akin to the 2008 crash. It will now run those tests once every two years, in order to alleviate the burden on banks that it believes are now strong enough to require slightly less oversight.
The Bank will supplement those bi-annual exercises with “exploratory” exercises testing resilience to a wider range of risks that could include another climate review.
The Bank also warned on Friday that higher trade barriers could hit global growth and feed uncertainty about inflation, potentially causing volatility in financial markets.
The Bank said the financial system could also be hit by disruption to cross-border capital flows and a reduced ability to diversify risk, although it stopped short of directly referring to Donald Trump’s return to the White House, which is expected to affect global trade.
“A reduction in the degree of international policy cooperation could hinder progress by authorities in improving the resilience of the financial system and its ability to absorb future shocks,” the Bank said.
