The Bank of England Financial Policy Committee’s (FPC’s) Financial Stability Report said just over five million households would see their repayments rise, compared to the nearly four million at the time of its December report.
This is due to quoted rates on new mortgages being 72 basis points (bps) higher than at the time of the previous report, with the average two-year fixed rate at 75% loan to value (LTV) now standing at 4.92%.
Meanwhile, the typical two-year fixed rate at 90% LTV is now 5.32%, 75bps higher than in December.
However, the increase in mortgage repayments is expected to be softer than previous increases, the FPC said.
A typical owner-occupier coming off a fixed rate in the next two years will see their mortgage repayments rise by just £45, significantly smaller than the increase of £120 between the end of 2022 and 2024.
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Despite this lower rise in costs, borrowers are less likely to see their repayments rise over the next few years compared to what was expected before the Middle East conflict.
Borrowers on pre-2022 mortgages will see highest rise in costs
Many households will still experience a notable increase in mortgage repayments, particularly those on a fixed rate secured before rates started rising in 2022. The report said that nearly 750,000 households paying interest of less than 3% would come off these fixed rates in 2026 and see their repayments go up by £170 per month on average.
Households remain resilient to rising costs
Although higher borrowing costs and energy prices could put financial pressure on households, these increases will need to be steeper to take pressures to previous peaks, the report said.
The share of post-tax household income spent on mortgage repayments, the debt servicing ratio (DSR), was flat at 7.5% at the end of last year. The bank has predicted this would increase to just above 8% by the end of 2028 if higher energy prices persist, suggesting a marginal increase.
Further, signs of distress across households have remained low and the FPC said there were “limited signs of pressure building” in recent months.
The share of mortgages in more than 2.5% in arrears is 0.9%, close to long-term averages.
The FPC said although the data did not capture any distress since the Middle East conflict began, market insight suggested that household resilience has remained stable.
Boost in high-LTI lending
Since the FPC updated its recommendation for the loan-to-income (LTI) flow limit, allowing lenders to complete more high-LTI mortgages, the share of high-LTI lending rose to 13.2% in Q1 this year, up from 11.8% during the final quarter of last year.
The four-quarter rolling average stands at 10.8%, below the 15% aggregate limit.
The FPC said the rise in high-LTI lending was supported by a strong supply of credit and lender competition, and the fact that the share of lending was nearing the aggregate limit showed the loosened policy was “working as intended”.
The FPC said mortgage approvals were broadly flat in Q1 and had been mixed in Q2, although there was a rise in April as borrowers brought activity forward after the Middle East conflict. However, approvals fell to their lowest level since 2023 in May.
Going forward, the FPC said approvals could remain muted due to uncertainty and weaker macroeconomic conditions, but mortgage supply would stay strong.
This aligns with the recent Credit Conditions survey, where lenders forecast that mortgage demand would fall in Q3.
