(Bloomberg) — The Bank of England said 4 million households will feel a significant increase in mortgage payments next year and a further 2 million by 2025, adding to headwinds facing the housing market.
(Bloomberg) — (Bloomberg) — The Bank of England said 4 million households will feel a significant increase in mortgage payments next year and a further 2 million by 2025, adding to headwinds facing the housing market.
The central bank said the average payment for those who remortgage will reach £1,000 a month next year — £250 pounds a month higher than the current level. That would cause severe financial difficulties for an extra 220,000 households, taking the total struggling to service their debt to 670,000.
Within three years, 70% of mortgage holders will see their payments increase.
The findings in the BOE’s report on risks to the financial system underscore the weaker outlook many economists have for the housing market. Property prices have fallen for three months, the sharpest downturn since the global financial crisis more than a decade ago.
“Falling real incomes, increase in mortgage costs and higher unemployment will place significant pressure on household finances and weigh on their ability to service debt,” BOE Governor Andrew Bailey said in a letter to the Treasury.
The BOE said buy-to-let investors were particularly vulnerable, since about 85% of mortgages to landlords were interest only, making them highly sensitive to rising borrowing costs.
It warned that landlords would either raise rents for tenants or sell off their portfolios, causing a deeper fall in house prices.
“Were landlords to seek to offset the projected rise in buy-to-let mortgage costs, it was estimated they would need to increase their rental income by around 20%,” the BOE report said. “This would increase the cost of housing for renters.”
The BOE has lifted its benchmark lending rate eight times in the past year, seeking to choke off inflation that’s lingering at a 41-year high.
Bailey said households were in better shape to cope with higher interest rates than in the last financial crisis or the 1990s recession that left millions paying mortgages worth more than their homes.
“The aggregate mortgage debt service ratio now is lower than it was before the start with financial crisis and the time of the early 1990s recession when we had quite a severe, mortgage and housing crisis,” Bailey said at a press conference. “Households and businesses are more financially resilient than they were in previous periods of stress.”
Deputy Governor Jon Cunliffe said the ratio of household debt to income is about 20 percentage points lower now than it was during the financial crisis.
“One wouldn’t expect anything like the degree of foreclosures and forced sales that you saw in the 1990s,” Cunliffe said. “What you might expect, is that of course households will be squeezed and that will affect their consumption.”
–With assistance from Liza Tetley.
(Updates with comment from Bailey press conference in final paragraphs.)
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