More than five million homeowners in the UK are now expected to see their mortgage payments increase by the end of 2028, according to new Bank of England forecasts.
The figure is around one million higher than the Bank previously estimated in December, following the economic impact of the Iran war and its effect on energy prices and inflation.
Smaller increases than recent years
Despite the rise in the number of affected borrowers, the Bank of England said the impact would be less severe than the increases seen in recent years.
A typical homeowner moving off a fixed-rate mortgage within the next two years is expected to face an increase of around £45 per month.
This compares with an average rise of £120 per month for homeowners securing new deals between the end of 2022 and the end of 2024.
However, around 750,000 homeowners currently paying interest rates below 3% are expected to move onto new deals this year, facing an average monthly increase of £170.
More than 80% of mortgage customers in the UK have fixed-rate agreements, meaning their payments remain unchanged until their deal expires.
Iran war pushed up inflation risks
The Bank of England said the economic effects of the Iran war contributed to higher energy costs after the closure of the Strait of Hormuz, a major global shipping route responsible for around a fifth of global energy supplies.
The increase in oil and gas prices pushed inflation higher and raised concerns that central banks could delay interest rate cuts or increase rates further.
Banks passed higher borrowing costs on to customers, affecting first-time buyers and those refinancing existing mortgages.
According to financial information service Moneyfacts, the average two-year fixed mortgage rate increased from 4.83% at the start of March to a peak of 5.90% on 12 April. It has since fallen to 5.49%.
Household finances remain resilient
The Bank of England said household finances had remained resilient despite a difficult economic environment.
It noted that household debt remained low compared with historical averages, although lower-income households and renters remained more exposed to higher energy costs.
“These households spend a larger share of their income on essentials, limiting their ability to adjust spending in response to higher prices,” the report said.
The Bank added that rising debt was unlikely to trigger a sharp reduction in consumer spending.
AI risks and financial concerns
The Financial Stability Report also highlighted growing risks linked to rapid advances in artificial intelligence, particularly the threat of cyber attacks.
The Bank warned that valuations of AI-related stocks had become increasingly stretched, raising concerns about a possible market bubble.
The warning follows a similar concern raised by the Bank in December.
Also read: Israel-Lebanon talks to take place in Rome on 15-16 July
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