Mortgage hikes for millions but lenders hold firm Bank of England says

The Bank of England has found major UK banks are well-equipped to handle a severe economic downturn. However, the same cannot be said for small businesses and households, which are facing challenges due to higher interest rates and living costs.

The findings were revealed in the central bank’s stress test, which assessed the resilience of eight of Britain’s largest lenders to extreme economic conditions.

While the banks emerged as “resilient” in the face of adverse scenarios such as persistently high inflation, rising global interest rates, deep recessions in the UK, and increased unemployment, the report highlighted the mounting pressure on households and businesses.

The Bank’s latest Financial Stability Report revealed nearly one million households with fixed-rate mortgages will experience a significant increase in monthly repayments, amounting to approximately £500 by the end of 2026.

The impact of higher interest rates is gradually being felt by homeowners with fixed-rate mortgage deals, typically lasting two or five years. Refinancing during the second half of this year could result in the average household seeing their monthly interest payments rise by around £220, with an increase of approximately 3.25 percentage points in their rate.

By the end of 2026, nearly a million people could face a monthly repayment increase of £500, while over half a million may experience a jump of more than £750. In total, four million fixed-rate mortgage holders are expected to face higher borrowing costs in the coming years.

Buy-to-let landlords are also feeling the impact of higher mortgage rates, leading some to sell their properties or pass on the increased costs to renters.

The Bank said in its report: “Although the proportion of income that UK households overall spend on mortgage payments is expected to rise, it should remain below the peaks experienced in the global financial crisis and in the early 1990s.

“UK banks are in a strong position to support customers who are facing payment difficulties. This should mean lower defaults than in previous periods in which borrowers have been under pressure.”

However, the report also highlighted concerns about the increased use of credit and a slight rise in the number of borrowers falling into arrears during the first quarter of 2023.

The Bank warned: “Further deterioration of households’ finances, including higher mortgage or rental payments, could increase pressures on households, potentially leading to higher consumer credit arrears or default rates.”

In addition to households, businesses, particularly smaller firms with higher levels of debt, are facing challenges due to higher borrowing costs. The Bank emphasised the need to address these issues to prevent further strain on the economy.

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