The Financial Stability Report from the Bank of England’s Financial Policy Committee (FPC) found that 37% of borrowers had not re-fixed their rates since costs started to rise in 2021, meaning they were yet to experience the full impact of higher interest rates.
However, these accounts are expected to refinance onto higher rates from December this year through to the fourth quarter of 2027.
Some 31% of these, or 2.7 million borrowers, will refinance onto a rate of more than 3% for the first time, while 5% or around 420,000 people will see their monthly payments increase by more than £500.
Other borrowers will benefit from a reduction in the base rate, the FPC said, as around 27% or 2.4 million people will see monthly payments drop over the same three-year period.
Some 1.7 million, or 19% of borrowers, are on variable rates, while 800,000 are currently fixed above prevailing rates.
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Its data also showed that 23% of accounts, or 2.1 million, would see no change to their mortgage payments from the end of this year to the end of 2027.
Longer mortgage terms softening payment shocks
On balance, the average homeowner coming off a fixed rate in the next two years will see their monthly mortgage payments rise by around £146, or 22%. This is a lower increase than the FPC’s June report, which found that there would be a 28% or £180 rise for refinancers.
The FPC noted that more mortgage borrowers were choosing longer mortgage terms, which reduced their payments in the short term but meant they had more debt to service overall. It said if this trend continued, this would lower the expected average rise in mortgage payments.
Banks have capacity for more high-LTI lending
The FPC said although the share of higher loan to income (LTI) had risen to 7%, it was still below the regulatory limit of 15%.
Therefore, banks are able to lend on mortgages with high LTIs, above four-and-a-half times income, which the FPC said would be useful for first-time buyers, who tend to struggle to raise a deposit.
The share of new house purchase mortgages issued to first-time buyers reached 52% in Q3, up from 44% in 2013. This was near its highest point for almost 20 years.
Overall, the number of mortgages approved for house purchases each quarter is broadly similar to 2013.
Improved resilience among mortgage borrowers
The FPC said household debt as a share of income had continued to fall since its June report, and the outlook for mortgage borrower resilience improved in line with the economic outlook.
It said rising incomes and falling interest rates meant the share of household income spent on mortgage repayments was set to increase by less than previously forecast.
The aggregate mortgage debt-servicing ratio (DSR) fell to 7.2% in June, but it is expected to rise to around 8% by the end of 2026. This is lower than the previous prediction that it would rise to 8.4%.
This would also be lower than levels experienced during the global financial crisis and the recession in the early 1990s.
The share of households in arrears or with high debt-servicing burdens has stayed low, the FPC said.
The proportion of households with high mortgage cost of living, defined as more than 70% of income, was flat at 1.2% in Q3.
This is expected to remain lower than the pre-global financial crisis peak and below predictions made in the FPC’s June report.
Borrowers also have increased their savings, meaning they are more resilient to potential shocks. Further, mortgage arrears stayed low at 1.1% and are expected to remain below levels during previous economic crises.
Signs of growing lender appetite
The FPC said there were “initial signs” that lenders’ risk appetite was starting to grow, as the flow of lending at higher loan-to-value (LTV) tiers and higher LTI ratios rose by around 1% in Q3. This is still below 2019 levels, however.
The report said banks and building societies were well-capitalised, with high levels of liquidity.
