The Bank of England (BoE) said around 4.5 million mortgage accounts had already seen increases in monthly repayments since rates started increasing at the end of 2021.

As part of its latest Financial Stability report for July, the Financial Policy Committee (FPC) of the BoE said a further four million accounts are expected to be impacted by rate rises by the end of 2026.

It predicts that one million mortgage holders – including those on variable rate products – will see a £500 jump in monthly payments by that time. 

The committee added that while more households were using consumer credit, mortgage and credit arrears had remained low. The probability of mortgage defaults may also be limited by forbearance measures, it suggested. 

It noted there was evidence suggesting that households were extending their mortgage terms to reduce monthly payments. According to the committee, new lending terms at longer than 35 years rose from around 5% in Q1 2022 to 11% in Q1 2023. Further, 15% of borrowers who remortgaged in Q1 this year extended their existing term. 

Mortgage bills a bigger chunk of income

The proportion of post-tax income which is spent on mortgage payments is expected to rise from 6.2% to 8% by mid-2026. 

The FPC said if this happened it would be below the peaks seen during the global financial crisis in 2007 to 2008 and the recession which happened in the early 1990s, despite rates being at a similar level. 

The UK household debt to income ratio is also lower than it was during the global financial crisis, at 118% in Q1 2023 compared to 150% in 2007 to 2008. 

The committee also looked at the finances of households after tax and essential spending. 

It found that households with higher mortgage cost of living-adjusted debt servicing ratios (COLA-DSR), particularly those where it was over 70%, were more likely to struggle with meeting debt repayments. 

The FPC said a rise in defaults due to this could affect lender resilience. 

There are more households with a high mortgage COLA-DSR, as this has risen from 1.6% in Q3 2022 to 2% in Q1 2023. 

This is expected to continue to increase over the year to around 2.3% or 600,000 households by the end of 2023. However, it will still be below the 3.4% peak seen in 2007 when around 870,000 households were affected. 

The committee said for households to be affected like they were during the global financial crisis, mortgage rates would need to rise three percentage points higher than they are now. 

Buy-to-let to get less profitable 

The FPC said buy-to-let mortgage holders had also been impacted by higher rates and mortgage borrowers could see average monthly payments rise by £275 by the end of 2025.

The committee said if landlords completely absorbed the higher costs, then the share of buy-to-let mortgages with interest coverage ratios (ICRs) below 125% would increase from 3% at the end of 2022 to over 40% by 2025. 

ICR measures a landlord’s rental income in comparison to their interest payments. 

The committee predicted that a fall in profitably could lead to landlords selling up and exiting the market. It suggested that if this happened in large enough numbers, house prices could fall. 

It said some of this could be mitigated if the properties disposed of by smaller landlords were purchased by professional landlords but added that it was hard to determine a “comprehensive view” of the overall impact on the housing market. 

The report stated: “However, available evidence suggests that recent market exit by some landlords has caused a certain degree of shrinkage of the private rented sector as a whole, but not on a scale likely to have a material impact on house prices overall.” 

For landlords who pass the costs onto tenants in the form of higher rents, the committee said this could cause tenants to become more reliant on consumer credit and make renters vulnerable to “adverse shocks”. 

Ben Beadle, chief executive of the National Residential Landlords Association, said: “Growing mortgage costs are putting responsible landlords in an impossible position. Either they leave the market at a time when demand for rented housing is already outstripping supply, increase rents, or soak up growing costs which many simply cannot afford.

“Whilst help has been provided for homeowners in the form of the Government’s Mortgage Charter, nothing has been done to support the private rented sector.

“It is vital that ministers step in to protect the market from the impact of growing costs. For renters, housing benefit rates need to be unfrozen without delay to ensure they can cover their rent payments. Alongside this, tax hikes on the sector need to be scrapped to boost the supply of homes to rent that tenants desperately need.”