The Bank of England’s Financial Policy Committee (FPC) said higher mortgage rates and energy prices would put pressure on household finances, but increases would need to be “large and persistent” to have a widespread impact on people’s ability to repay their mortgages.
Based on overnight index swap rates, around 5.2 million or 58% of mortgagors could see higher mortgage repayments by Q4 2028.
However, the FPC said these rises would be “modest” in comparison to increases seen in recent years, as most mortgagors would already be on higher rates.
Mortgage-debt servicing burdens on households would increase but remain “well below historic[al] peaks” at an aggregate level.
Further, the average rise in mortgage rates has stayed below the increase in corresponding swap rates, with the FPC estimating respective 80-basis-point and 70-basis-point rises in average two- and five-year fixed rates as of its meeting on 27 March.
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The committee said the total number of mortgages on offer had dropped from around 8,500 to 7,000, but there were more products available than after the mini Budget or the first Covid-19 lockdown.
UK households remain resilient despite the challenging outlook, as aggregate indebtedness continues to be low by historical standards.
The FPC said its loan-to-income (LTI) flow limit and the Financial Conduct Authority’s (FCA’s) responsible lending rules protected households from an unsustainable rise in indebtedness.
Today, the FCA and Prudential Regulation Authority (PRA) consulted to permanently remove the LTI cap, and the FPC said that as of Q4 2025, the aggregate share of lending at high LTIs had risen to 11.5%.
This aligns with the FCA and PRA’s intention to maintain an aggregate limit of 15% on high-LTI lending.
UK banks remain ‘appropriately capitalised’
The FPC said it was monitoring credit conditions, noting the withdrawal and repricing activities of lenders in recent weeks.
It said before this, credit conditions had eased in line with the macroeconomic outlook and policy changes in the mortgage market. Ultimately, the UK banking system remained “appropriately capitalised”, and there was no evidence that banks were restricting lending to protect their capital positions.
The committee said UK banks would be able to continue supporting households and businesses, even if conditions were “substantially worse” than expected.
Richard Pinch, senior director of risk at Broadstone, said: “The Bank of England’s latest Financial Policy Committee report highlights how the current conflict in Iran is driving heightened risks to financial stability.
“While the UK banking system remains resilient, the concern is clearly shifting towards higher borrowing costs, pressure on household finances and potential stress in debt markets if macroeconomic conditions deteriorate further.”
He added: “The message from the bank is that the system is strong enough to withstand this shock, but the external risk environment has become significantly more challenging.
“With this in mind, banks and other lenders must ensure they are closely monitoring their exposures and remaining in close contact with their customers to provide targeted and appropriate levels of support.”
AI currently poses little ‘systemic risk’
The FPC assessed the use of artificial intelligence (AI) in financial services, noting that the Bank of England and FCA were actively promoting responsible use of the technology.
It said it was supportive of the steps taken to ensure existing regulations were flexible, outcomes-based and effective.
At present, the FPC identified “little evidence” that the financial system had adopted more advanced forms of AI in a way that would pose a systemic risk. This included little evidence that AI was being used to make core financial decisions, such as credit or insurance underwriting.
However, it said considering the development of what AI could do, risks could increase as financial firms implement the technology further.
