The Bank of England has issued a fresh warning to millions of UK households with mortgages, highlighting the increasing financial pressures that could affect borrowers in the near future. As part of its latest Financial Policy Committee (FPC) meeting, the Bank cautioned that, while the UK banking system remains strong, global instability and rising financial costs may soon hit borrowers at home. The Bank also noted that the full impact of previous interest rate rises has yet to fully affect many households. The growing number of high-risk loans and continued global economic uncertainty could worsen the situation, particularly for those on variable or tracker mortgages, according to GB News.
Rising Borrowing Costs and Financial Pressures
The Bank of England has warned that mortgage holders may face increasing challenges as debt servicing costs continue to rise. Although mortgage arrears remain low for now, the Bank highlighted that the overall mortgage debt servicing burden is expected to climb. Despite this, it is still projected to remain lower than previous peaks during the 1990s and the global financial crisis. However, the rise in high-risk lending is concerning, with the share of UK mortgage lending at high loan-to-income (LTI) ratios rising to 7.8% in the last quarter of 2024. This increase in risky loans could add further stress to the financial system as global instability continues to grow.
The Impact of Global Instability and Mortgage Rate Cuts
Global economic developments, particularly US tariffs announced in April, have contributed to increased risks to global growth, which could affect domestic financial conditions. This, in turn, could lead to higher mortgage costs and impact the availability of lending. However, the Bank of England has maintained its base rate at 5.25%, with some market experts predicting up to three interest rate cuts this year. Despite the economic turbulence, certain UK lenders have begun cutting mortgage rates, responding to market volatility. The TSB recently reduced its two-year fixed-rate deals by up to 0.25 percentage points, and MPowered Mortgages also lowered rates across its products.
While some homeowners may benefit from these rate reductions, others, particularly the 1.3 million homeowners coming to the end of their fixed-rate deals between April and December, may face significantly higher mortgage repayments despite recent rate cuts. This shift is likely to hit borrowers hardest who locked in lower rates before the interest rate hikes began in 2021.
