Some four million mortgage borrowers will see their monthly payments rise at the end of next year as the risk of household defaults on debt has increased, the Bank of England has warned.
People with a fixed-rate home loan maturing in late 2023 are facing average monthly repayment increases of around £250 as they are forced to refinance at a higher rate.
This is based on market interest rates at the end of November, with the Bank’s base rate set at 3% and set to rise again on Thursday.
This could mean costs rise by £3,000 a year for many families who are already seeing their finances strained as prices rise across the board.
But increased pressure on households should not call into question the resilience of UK banks, which will be well equipped to support lending, the bank’s Financial Policy Committee (FPC) said.
That’s because big banks and building societies have strong balance sheets, higher profits and have increased their provisions to support credit losses, he said.
The FPC said in its financial stability report: “The capital and liquidity positions of major UK banks and building societies remain strong and pre-delivery profitability has increased.
“They are therefore well positioned to absorb shocks and continue to meet the credit needs of households and businesses”.
Furthermore, the FPC found that households are more resilient now than they were before the financial crisis in 2007 and the recession in the early 1990s.
People have, overall, less debt than they did at the peak before the financial crash, and while the percentage of disposable income spent on mortgages in the aggregate is expected to rise, it will remain below observed peak levels.
Bank of England Governor Andrew Bailey added he believed there would be fewer home foreclosures than in previous financial crises thanks to increased support from lenders.
He said: “Banks are now required by regulation to support their customers through these issues more than they did in the past.
“There is a second part to that, as a more financially sound banking system will be in a better position to do that, to support those customers.
“I hope and believe that more customers will be supported through this and we won’t get the level of recovery, and therefore the level of loan losses, that has occurred in the past.”
However, according to the report, the number of people in default is set to increase next year.
“However, many households will find it difficult to manage higher interest rates coupled with continued increases in the cost of basic necessities and the pressure on UK households will increase,” the FPC added.
“As household debt service burdens continue to rise over the next year, arrears and defaults are likely to increase.”
The FPC stress tests major banks to see how well they can withstand economic shocks and deteriorating conditions.
The results of the latest test are expected to be published in the summer of 2023 and will help inform banks’ cash buffers.
The FPC also announced it would launch the first-ever stress test on the non-bank sector next year after the recent turmoil in the mini-budget market that saw the near collapse of some pension funds.
He said more work needed to avoid non-banks posing a risk to UK financial stability after gilt yields rose at historic rates in September and the Bank was forced to intervene.
Non-banking activities are defined as any financial institution that is not a bank, and includes pension funds and liability-based investment funds (LDIs), the investment strategies at the heart of the pension crisis triggered by the mini-budget mess.