UK Households Spending High Proportion of Income on Mortgage Payments Expected to Decrease

The Bank of England (BoE) has stated that the number of UK households spending a high proportion of their income on mortgage payments is expected to be lower than previously estimated. The bank’s Financial Policy Committee (FPC) predicts that nearly half a million households will spend more than 70 percent of their income, after tax, on mortgage payments by the end of 2023, which is a decrease from the previously estimated 650,000 households.

Financial Outlook for Borrowers

The slight drop in the number of households spending a high proportion of their income on mortgage payments comes amid growth in household income since July. However, the bank has warned that increased living costs and higher interest rates are yet to be reflected in higher mortgage payments. This means that many borrowers may face stretched household finances.

According to the bank’s estimates, just under 900,000 households will face a payment increase of more than £500 a month due to higher interest rates. Additionally, around 20 percent of households will see a jump of more than £1,000 per month. These expected jumps in mortgage payments could have a considerable impact on people’s finances, especially considering that the median disposable income for UK households is £32,000 per year and slightly over £2,000 per month.

Rising Interest Rates and Financial Risks

The FPC has warned that almost 5 million UK homeowners will see their mortgage repayments increase over the next three years. The blame for rising interest rates and heightened risks in the global financial markets lies with the Bank of England. Since interest rates started rising in late 2021, more than 5 million households have brokered a new fixed-rate deal. However, a further 5 million homeowners will still experience higher costs by the end of 2026, according to the FPC.

The Bank of England has been consecutively raising interest rates in the past two years before pausing the trend in September. The current interest rate stands at 5.25 percent. Economists do not expect a rate cut until late 2024, with the last meeting for this year of the bank’s Monetary Policy Committee, which sets the interest rate, taking place next week.

Falling Into Arrears

The increase in interest rates has led to a rise in the overall share of households falling behind in paying their mortgages, according to the FPC. Bank of England Governor Andrew Bailey stated that the number of homeowners falling into arrears was in the residential and buy-to-let sectors. However, he added that the numbers remained low by historical standards and were still “well below” peak levels in 2008.

Despite some households and businesses struggling to make their mortgage payments, the UK banking system is deemed strong enough to support them. The report by the FPC states that UK banks have large capital buffers and other resources to absorb any potential losses or outflows of cash. However, the report also acknowledges that there are those who are more adversely affected, particularly businesses in sectors exposed to a slowdown or with a large amount of debt.

The FPC highlights that many businesses will not have to renew their fixed-rate loans or other debt before 2025, giving them more time to manage their budgets in accordance with higher borrowing costs.