Mortgage payments for half of UK homeowners set to rise over the next three years | mortgage

Mortgage payments for half of UK homeowners will rise over the next three years, putting additional pressure on the finances of 4.4 million households, the Bank of England has said.

The bank's Financial Policy Committee said this would include 500 monthly increases to the mortgages of around 420,000 households.

The committee found that more than a third of borrowers – around 37 per cent – have been protected from interest rate rises so far because they fixed their mortgages before increases began in the second half of 2021.

Approximately 31% of all mortgage holders, or 2.7 million households, are expected to refinance for the first time at an interest rate above 3% before the end of 2027.

This includes up to 1.5 million households who will have to take out higher mortgage loans for the second time since interest rates began rising three years ago.

In its Financial Stability Report, the Banking Council said this would increase monthly payments by an average of 22%, adding about $146 to a typical bill. However, this is slightly lower than the previous forecast for June, which had pointed to an increase of 180.

Overall, 50% of mortgage holders will see their mortgage payments increase over the next three years, 23% will see no change and 27% will see their payments decrease.

The bank's policymakers announced earlier this month a quarter-point cut in interest rates to 4.75%, raising hopes that the rate cut would ease household burdens in the long term.

But the bank warned that the situation for poor households was worsening. Pressure on renters and low-income households continues. It found that the savings buffer of low-income households had decreased, and the proportion of renters who were behind on their payments had increased slightly.

Separately, Bank Governor Andrew Bailey said uncertainty about the global economic outlook had increased. Geopolitical risks remain high and these risks are particularly relevant to UK financial stability because we are an open economy with a large financial sector, he said.

Policymakers also announced the results of the first stress test for the shadow banking sector. Hedge funds, pension funds and other companies in the unregulated sector are at risk of amplifying market shocks and triggering a $17 billion sale of assets, it found.

The exercise, a world first by a central bank, tracked how non-bank financial institutions, often referred to as the shadow banking sector, would react to short, sharp shocks affecting financial markets.

Stress tests show that in this scenario, companies would rapidly sell up to $17 billion worth of assets as they scramble to raise capital or limit activity in ways that would amplify the impact.

There are concerns that risks are emerging in the shadow banking sector, which could replicate the problems experienced in the financial sector ahead of the 2008 financial crisis.

The Prudential Regulation Authority (PRA), the banking regulator, said industry standards had made some players in the shadow banking industry – including insurers, money market funds and liability-focused investment funds – more resilient, but a lack of regulation had made their resilience unstable and could worsen over time. There was.

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Shadow banking refers to financial companies with little or no regulation compared to traditional lending institutions, and includes hedge funds, private lending, and private equity funds.

More than 50 city agencies participated in the exercise, including insurance companies, clearinghouses, asset managers, pension funds and hedge funds.

The PRA said it would begin scaling back annual bank stress tests, which were introduced in 2015 to check whether banks can withstand a major shock similar to the 2008 financial crisis. It will now run these tests every two years to ease the burden on banks that it believes are strong enough to require slightly less supervision.

The bank will complement these biennial exercises with exploratory exercises testing resilience to a wider range of risks, which could include another climate review.

The bank also warned on Friday that higher trade barriers could hurt global growth and increase uncertainty about inflation, potentially leading to volatility in financial markets.

The bank did not directly address President Donald Trump's return to the White House, but said the financial system could also be hit by disruptions to cross-border capital flows and reduced risk-diversification capabilities, which are expected to impact international trade.

A decline in the level of international policy cooperation could hinder the progress of authorities in improving the resilience of the financial system and its ability to absorb future shocks, the bank said.

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