Almost one million households may be unable to pay their mortgages next year, the Bank of England has warned.
The central bank estimated some 800,000 families will struggle to deal with their home loans in 2023 – up from around 500,000 last year and the highest since the run-up to the 2008 financial crisis.
The warning will set alarm bells ringing among the millions looking to buy a home. The average mortgage now carries an interest rate of more than 6 per cent, compared to 2.35 per cent a year ago.
Under pressure: Chancellor Kwasi Kwarteng with Bank of England Governor Andrew Bailey
This adds an extra £5,000 to annual interest payments for the average family with a £200,000 two-year fixed mortgage, according to website Moneyfacts.
Lender Aldermore yesterday launched new mortgages, including a two-year fixed rate of 9.28 per cent for a borrower with a 10 per cent deposit.
And around 2m households currently on fixed-rate deals will need to remortgage by 2024 as their deals expire.
In its report, the Bank’s Financial Policy Committee said rising interest rates mean 2.8 per cent of households, or 800,000 people, will spend 70 per cent of their income on housing debt and essentials in 2023.
At this point, households are likelier to fall into arrears. Last year 1.7 per cent of households were in the same position.
In its report, the Bank committee said: ‘The continued rise in living costs and interest rates will put increased pressure on UK household finances in coming months and make households more vulnerable to shocks.’
Borrowing costs have been rising since December when the Bank began hiking interest rates at an unprecedented pace to get a grip on the soaring cost of living.
Rates now stand at 2.25 per cent but, with inflation close to 40-year highs at 9.9 per cent, further hikes are expected.
It is thought the Bank, which is led by governor Andrew Bailey, could raise rates by another 0.75 percentage points – or even by one percentage point – at its next meeting in November. That could drive mortgage rates higher.
The chaos on markets after Kwasi Kwarteng’s mini-Budget on September 23 has made matters worse for borrowers.
Government debt or ‘gilt’ prices slumped, as investors worried about the cost of Kwarteng’s tax cuts. This boosted the rate on financial instruments known as swaps, which are tied to gilts.
Mortgages are calculated by reference to the swap rate – so their cost has also ballooned.
Andrew Wishart, a property economist at Capital Economics, said: ‘We expect arrears to rise from 0.7 per cent of mortgages now to 1.6 per cent in 2024.’
Michael Hewson, an analyst at CMC Markets, said: ‘The risk is that higher rates could tip house prices lower, and leave a lot of mortgage holders in negative equity in echoes of what happened in the 1990s.’
Leeds Building Society said current mortgage rates are the least affordable since records began. Surging house prices and higher household debt means families spend a greater proportion of income on mortgages than ever.
Today’s average mortgage rates of 6.43 per cent are equal to a rate of 25.7 per cent in 1980, Leeds claimed.
This post first appeared on Dailymail.co.uk
