A Million More UK Homeowners Braced for Higher Mortgage Bills, Bank of England Warns

An additional one million homeowners across the UK are now expected to face higher mortgage bills than the Bank of England had previously forecast, largely as a result of the economic fallout from the Iran conflict.

According to the Bank's latest projections, just over five million homeowners should anticipate an increase in their monthly repayments by the end of 2028. That marks a sharp rise from the four million estimated in December.

Despite the higher numbers, the Bank's Financial Stability Report stressed that the overall impact would be less severe than in recent years.

How much bills could rise

A typical owner-occupier coming off a fixed-rate deal within the next two years is likely to see monthly repayments climb by around £45. That compares favourably with a typical increase of £120 faced by those who took out new deals between the end of 2022 and the end of 2024.

However, some borrowers will feel a sharper pinch. Around 750,000 homeowners currently paying less than 3% interest are due to roll off those deals this year, and they could see repayments rise by an average of £170 a month.

More than eight in ten mortgage customers hold fixed-rate deals, where the interest rate stays unchanged until the term expires — usually after two or five years — before a new deal is arranged.

The Bank estimates that more than two million borrowers on two-year fixed deals expiring by the end of 2028 will likely remortgage at rates close to their existing ones, seeing little change. But these households are now unlikely to benefit from the falling repayments that had been anticipated before the conflict.

The energy and inflation link

The Iran conflict led to the closure of the Strait of Hormuz, a shipping lane that typically handles around a fifth of global energy supplies. The disruption pushed up oil and gas prices, fuelling inflation and raising the prospect of central banks lifting interest rates.

Those higher-than-expected rates were passed on to consumers, increasing costs for first-time buyers and those refinancing. According to financial information service Moneyfacts, the average two-year fixed rate rose from 4.83% at the start of March to a peak of 5.90% on 12 April, before easing back to 5.49%.

A challenging economic backdrop

The report highlights the difficult economic conditions facing Andy Burnham, who is expected to take over from Sir Keir Starmer as Labour leader and prime minister this month.

The Office for Budget Responsibility (OBR) warned this week that public debt risks spiralling in the years ahead. It described the UK's public finances as being in a "challenging" position, with debt set to roughly triple to nearly 300% of GDP over the next 50 years unless the government acts.

The OBR's Fiscal Risks and Sustainability report cautioned that "unsustainable fiscal outcomes that may not occur for some years are today's challenge not tomorrow's". It noted that keeping debt at its projected 2030-31 level of 95% of GDP would require spending cuts roughly equal to the entire education budget, or the equivalent of all corporation tax collected.

Households under pressure

The Bank of England said lower-income households, including renters, are likely to be more exposed to rising energy prices. "They spend a larger share of their income on essentials, limiting their ability to adjust spending in response to higher prices," it said.

Even so, the report concluded that household finances remained resilient "even in a challenging external environment", with overall household debt still low compared with historical averages. While some vulnerable, low-income households remain more exposed, the Bank said debt was unlikely to trigger sharp cuts in consumer spending.

Elsewhere in the report, the Bank noted that rapid advances in artificial intelligence had heightened the risk of cyber attacks. It also warned that valuations of AI stocks had become "more stretched" amid concerns of a bubble, echoing a similar caution issued in December.

With interest rates and energy costs still shaping the outlook, millions of households will be watching closely for their next remortgage. If you found this breakdown useful, share it with others who may be weighing up their own mortgage decisions.

Source: BBC Business