The Bank of England cautioned today that the cost of mortgages for millions of people is expected to skyrocket in the next year.
Homeowners with fixed-rate mortgages whose terms are set to expire by the end of 2023 will have to pay an average increase in monthly payments of £250 owing to the changeover to higher interest rates.
In this scenario, a typical family would spend 17% of pre-tax income toward mortgage service, up from 12%.
Over the course of the next 12 months, increases will impact four million owner-occupiers who have mortgages, or half of the total. 1.7 million of them have variable rates, as well as those whose fixes are about to expire.
For 2.7 million, payments will rise by at least £100.
In light of the broader cost-of-living challenges, the Bank’s most recent Financial Stability report predicted that there would likely be an increase in defaults.
It argued that the financial system can handle the additional stress since UK banks and building societies are ready, have robust balance sheets, and generate high profits.
Although the “economic situation is tough,” Governor Andrew Bailey underlined that families are more equipped to handle it than they were during the 2008 “Credit Crunch.”
We have high inflation, declining demand, and increasing interest rates, he said.
‘Financial pressure on households and businesses is increasing.
“Overall, however, both homes and companies are more financially resilient than they were in earlier times of hardship,” says the report.
In response to several pension funds almost collapsing due to falling gilt prices, Threadneedle Street expressed worry for the non-bank sector and said it will conduct a stress test in 2019.
The sobering research was released at the same time that official data revealed the sharpest real-terms income decline in 13 years.
A wave of strikes is sweeping the nation, and according to official data, total salaries decreased by 3.9% annually in the three months ending in October.
Since the aftermath of the financial crisis in 2009, that number was the worst. In the meanwhile, the unemployment rate increased to 3.7% and there are indications that older individuals who are in need of work are reentering it.
The percentage of people who are categorized as “economically inactive” fell by 0.2 percentage points. Additionally, although continuing at a historically high level, job openings decreased marginally, suggesting the tight labor market.
Chancellor Jeremy Hunt said that the somber statistics required “tough choices,” and that requesting enormous salary increases would just “prolong the misery for everyone” by instilling inflation.
After gilt yields soared to record highs in September, forcing the Bank to intervene, the Financial Policy Committee (FPC) of the Bank concluded in a report that more needed to be done to prevent non-banks from presenting a danger to the stability of the UK financial system.
Pension funds and liability-driven investment (LDI) funds are examples of non-banks, which are defined as any financial organization that is not a bank.
The FPC has previously conducted stress tests on the largest banks in the UK to assess their resistance to worsening economic circumstances.