About four million British households will face higher mortgage payments next year, the Bank of England has said, with the typical payment set to rise by £250.
The average monthly mortgage bill would rise from £750 to £1,000, according to the bank’s Financial Stability Report.
The rising costs would put another 220,000 households in serious financial difficulties, the bank said.
Businesses would also be under “significant pressure” from rising prices and borrowing costs, she added.
“Declining real incomes, rising mortgage costs and higher unemployment will put significant strain on household finances and affect their ability to service debt,” Bank of England Governor Andrew Bailey said in a letter to the Treasury.
The bank also warned of an increased risk of global financial risks. However, households, businesses and banks are more resilient than before the 2008 global financial crisis and the 1990s recession.
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Fixed-rate mortgage transactions have a fixed interest rate during the term. Most run for two or five years, but longer options are also available.
Anyone looking for a new one at the end of their fixed-rate contract, or first-time buyers taking out their first mortgage, have seen those loans turn out to be much more expensive than they probably expected or planned.
Rates on new fixed income deals rose during the year as the bank hiked rates to fight inflation, but they skyrocketed after the mini-budget, peaking at 6.65%.
However, they stabilized and then fell slightly ahead of and after Chancellor Jeremy Hunt’s autumn statement, which calmed markets and in turn reduced uncertainty for lenders and borrowers.
Floating or tracker rate mortgage loans are subject to change at any time, usually in response to decisions by the bank’s Monetary Policy Committee on the bank’s interest rate benchmark.
The various forms of home loans will increase the cost of mortgages for an estimated four million households over the next year, the bank said.
Another two million would cause higher costs by 2025, which would put additional strain on the housing market. Within three years, 70% of mortgage holders would increase their payments.
Meanwhile, house prices have fallen in three months, the sharpest drop since the global financial crisis more than a decade ago.
The bank said buy-to-let investors are particularly vulnerable because about 85% of mortgages to landlords are interest-only, making them very vulnerable to rising borrowing costs.
It warned that landlords would either raise rents for tenants or sell their properties, leading to a deeper drop in house prices.
“Should landlords attempt to offset projected increases in rental mortgage costs, it is estimated that they would need to increase their rental income by about 20%,” the bank’s report reads. “That would increase housing costs for tenants.”
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