About 4m mortgage borrowers to see repayments jump next year, Bank warns

Around four million mortgage borrowers are set to see their monthly payments jump at the end of the next year as the risk of households defaulting on debt has risen, the Bank of England has warned.

People with a fixed-rate home loan due to expire at the end of 2023 are facing average monthly repayment increases of about £250 as they are forced to refinance onto a higher rate.

This is based on market interest rates at the end of November, with the Bank’s base rate set at 3% and set to rise again on Thursday.

This could mean that costs surge by £3,000 a year for many households who are already seeing their finances stretched by soaring prices across the board.

But the increased pressure on households is not expected to challenge the resilience of UK banks which will be well equipped to support lending, the Bank’s Financial Policy Committee (FPC) said.

This is because big banks and building societies have strong balance sheets, higher profits, and have increased their provisions to support credit losses, it said.

The FPC said in its financial stability report: “Major UK banks’ and building societies’ capital and liquidity positions remain strong and pre-provision profitability has increased.

“They are therefore well placed to absorb shocks and continue meeting the credit needs of households and businesses.”

Furthermore, the FPC judged that households are more resilient now than in the run-up to the financial crisis in 2007 and the recession in the early 1990s.

People have, in aggregate, less debt compared with the peak that preceded the financial crash, and while the proportion of disposable income spent on mortgages in aggregate is projected to rise, it will remain below the peak levels seen.

The governor of the Bank of England, Andrew Bailey, added that he believes there will be fewer home repossessions than seen in previous financial crises due to greater support from lenders.

He said: “Banks are now required by regulation to support their customers through these problems more than they did in the past.

“There is a second part to that, as a more financially robust banking system will be better placed to do that, to support those customers.

“I do hope and believe that more customers will be supported through this and we won’t get the level of repossessions, and therefore the level of loan losses, that went on in the past.”

However, the number of people falling into arrears is set to rise next year, the report found.

“Nevertheless, many households will find it challenging to manage higher interest rates alongside the ongoing rises in the cost of essentials, and pressure on UK households will increase”, the FPC added.

“As household debt-servicing burdens continue to rise over the next year, arrears and defaults are likely to rise.”

The FPC stress-tests major banks to check how well they can withstand economic shocks and deteriorating conditions.

The results of the latest test are due to be published in the summer of 2023 and will help inform banks’ cash buffers.

The FPC also announced that it will launch the first ever stress test on the non-bank sector next year following the recent mini-budget market turmoil that saw the near-collapse of some pension funds.

It said more work needs to be done to prevent non-banks posing a risk to UK financial stability, after gilt yields surged at historic rates in September and the Bank was forced to step in.

Non-banks are defined as any financial institution that is not a bank, and includes pension funds and liability-driven investment (LDI) funds – the investment strategies at the centre of the pension crisis sparked by the mini-budget chaos.