Five million more households yet to feel full rate hike burden, Bank of England warns
The Bank of England has said that UK households and businesses have been “resilient” in the face of rising interest rates – but repeated previous warnings that the full effect of higher interest rates was yet to come through.
Unveiling its latest Financial Stability Report – which is published twice yearly – the Bank said that household finances remained “stretched by increased living costs and higher interest rates, some of which has yet to be reflected in higher mortgage repayments.”
The Bank, which raised its main policy rate 14 consecutive times between December 2021 and August this year to the current 15-year high of 5.25%, said that, because most mortgages taken out over recent years had been at a fixed interest rate, higher interest rates tended to have a lagged effect on households with a mortgage.
It said that around 55% of mortgage borrower accounts, around five million, had repriced since interest rates began to rise in late 2021.
But it warned: “Higher rates are expected to affect around five million [further] households by 2026.
“For the typical owner-occupier mortgagor rolling off a fixed rate between [April to June] 2023 and the end of 2026, their monthly mortgage repayments are projected to increase by around £240, or around 39%.
“As higher mortgage rates continue to flow through to UK households, the average debt servicing burden will increase.”
The report noted that, although average quoted mortgage rates had come down since the Bank’s last Financial Stability Report in July this year, they remained “higher than in the recent past”.
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People are waiting for mortgage rates to drop
Andrew Bailey, the governor, emphasised that the UK banking sector remained well capitalised and had come through the Bank’s recent stress tests well.
He added: “If economic and financial conditions were to materially worsen for households and businesses, our banking sector has the capacity to support them.”
He said that there was evidence that net interest margins (the spread between what banks charge borrowers and pay depositors and a key driver of bank profits) had peaked.
The governor highlighted that, “thank goodness”, despite higher mortgage costs there had not been a big increase in home repossessions as in the past.
He added: “The financial system is much better placed to support borrowers. It’s a benefit of financial stability that the system is able to take these actions. And that’s a good thing, a very good thing.”
Mr Bailey said that, while UK households and businesses had remained resilient in the face of higher borrowing costs, the Bank had noticed an increase in arrears among home owners – both those living in their own homes with a mortgage and among buy-to-let landlords.
He said that the Bank was “very alert” to the issue of renters and particularly in view of the fact that, with home ownership in decline, renters now formed a larger proportion of the population and also tended to be at the lower end of the income scale.
He went on: “There is obviously a financial stability lens on this and it comes through the buy-to-let market.”
Asked about the way in which some borrowers were responding to higher mortgage rates Sarah Breedon, the deputy governor responsible for financial stability, said the Bank had noted an increased uptake, over time, of long-dated mortgages of up to 35 years and particularly among younger borrowers.
She added: “The more important thing is lending into retirement when people might not have the income [to cover mortgage payments]. We don’t judge it as a financial stability risk but it is something we are watching.”
Mr Bailey said that, among corporates, there was also evidence of some arrears building up and in particular among small and medium sized businesses.
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How is the mortgage crisis affecting you?
But the report noted that the share of corporates at higher risk had fallen from its pandemic peak and pointed out that the bulk of UK corporate debt on fixed rates was due to mature in or after 2025.
The governor added: “We judge that the UK corporate sector as a whole has remained resilient.”
Further afield, Mr Bailey said that the overall risk environment remained challenging, singling out the Chinese economy – where many parts of the property sector remain under strain – as a particular risk for the global economy. He added that the “tragic events in the Middle East” had also contributed to geopolitical uncertainty.
The governor also sounded a warning on vulnerabilities in so-called ‘non-bank’ finance – services such as loans and credit which are not provided by banks but by other institutions, such as insurers, venture capital firms and currency exchanges.
In particular, he highlighted market-based finance – the provision of types of corporate credit, such as high-yield bonds and leveraged loans – where he said risks remained significant and, in some cases, had increased since the Bank’s last report in July.
He added: “There are now larger imbalances in the market in derivatives for US government debt – a key instrument in the financial system.”
The governor said that this could contribute to market volatility if hedge funds needed to unwind their positions in such instruments rapidly and noted that sharp movements in the prices of such assets could lead to wider dislocations as was shown during the LDI crisis which followed Kwasi Kwarteng’s mini-Budget in September last year.
The report also revealed that, since July, the Bank’s financial policy committee had been briefed on the continued adoption of artificial intelligence and machine learning in financial services and their potential financial stability implications.
Mr Bailey said: “I don’t pretend to be an expert on AI, because I am not, but when I speak to people who are they make the point [on] the complexity of the code behind it and the extent to which it is understood.
“It obviously has tremendous potential and particularly to improve productivity which would be a welcome thing.”
The governor also paid tribute to Alistair Darling, the former Chancellor, who died last week. He said Lord Darling was “wise, kind and had an absolutely wicked sense of humour.”
The Chancellor borrowed more than expected at the start of the new tax year, piling more pressure on the public finances ahead of next month’s spending review.
Data from the Office for National Statistics (ONS) showed estimated net borrowing of £20.2bn in April – higher than the £17.9bn forecast by economists and the fourth highest April total on record.
That was despite a £1.7bn projected boost from employer national insurance contributions – hiked in October’s budget to help get the public finances in order and which kicked-in on 6 April.
The main reasons for the rise in borrowing included increases in public sector pay, along with higher benefits and state pensions, the ONS said.
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The data will do nothing to ease nerves over the state of the nation’s coffers amid renewed concerns Rachel Reeves may be forced to act again, in the autumn budget, to meet her own “non-negotiable” fiscal rules.
They say she must balance day-to-day spending with revenues by 2029-30, while improving public services and targeting accelerated economic growth.
The Chancellor was forced to restore a £10bn buffer at the spring statement in March, led by planned welfare curbs, after the economy flatlined.
A further restoration of headroom may be on the cards in October, given that stronger growth in the first quarter of the year is forecast to prove elusive across the rest of 2025.
The run-up to next month’s spending review – which sets budgets for government departments – has been dominated by a political row over one of her first actions in the role, which saw universal winter fuel payments stopped.
Prime Minister Sir Keir Starmer confirmed on Wednesday that a U-turn, of sorts, is on the cards.
The prospect of a higher bill ahead will do nothing to ease the cost of servicing government debt, with bond market investors continuing to demand a higher premium to hold UK gilts.
Their concerns include not only the forecasts for slowing growth but also persistent inflation.
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What the inflation increase means for you
One good bit of news for Ms Reeves was a downwards revision by the ONS to its government borrowing figure for the last financial year.
The total dropped by almost £4bn to £148.3bn.
The shift was explained by higher tax receipts but the sum still remained about £11bn above the updated forecast by the Office for Budget Responsibility.
Darren Jones, chief secretary to the Treasury, said of the ONS figures: “After years of economic instability crippling the public purse, we have taken the decisions to stabilise our public finances, which has helped deliver four interest rate cuts since August, cutting the cost of borrowing for businesses and working people.
“We’re fixing the NHS, with three million more appointments to bring waiting lists down, rebuilding Britain with our landmark planning reforms and strengthening our borders, delivering on the priorities of the country through our plan for change.”
Read more from Sky News:
Bitcoin hits new record high
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There is a growing school of thought that Ms Reeves will need to raise taxes in October if she is to meet her commitments, including her fiscal rules.
Lindsay James, investor strategist at wealth management firm Quilter, said: “The decision to hold off on tax rises in the spring budget increasingly looks like a temporary reprieve.
“As borrowing continues to outstrip forecasts and debt interest costs remain elevated, pressure is building on the chancellor to make tougher choices.”
Bitcoin has surged to a new all-time high – breaking through $111,000 for the first time.
It means every single person who has bought it since 2009 (and held onto it) will be sitting on a profit.
The surge follows a pretty dramatic 2025 for Bitcoin (BTC), with Donald Trump’s presidency making this digital asset even more volatile than usual.
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BTC had first managed to hit $109,000 on 20 January – the day Mr Trump was inaugurated – with investors hopeful that he would introduce a slew of pro-crypto policies.
Despite the president coming good on some of those promises, the world’s biggest cryptocurrency soon fell, amid accusations these policies didn’t go far enough.
The White House has confirmed the US will treat Bitcoin seized from criminals as an investment, but there was disappointment when it was confirmed the government would not be buying additional coins for its “strategic reserve” using taxpayers’ money.
Bitcoin also took a battering in the immediate aftermath of Mr Trump’s controversial “Liberation Day” tariffs – slumping to lows of $75,000 in April as investors dumped riskier assets.
There are several factors behind this recent comeback, with laws designed to regulate the crypto sector now advancing through the US Senate for the first time.
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Feb: Hackers steal $1.5bn in cryptocurrency.
Interest in Bitcoin is also growing among hedge funds and financial institutions, while some companies are now in a race to buy as much of this cryptocurrency as possible.
One company called Strategy now has a war chest of 576,230 BTC worth $63bn – resulting in handsome profits of more than $23bn.
Part of BTC’s appeal lies in how it has a limited supply of 21 million coins, whereas the amount of traditional currencies in circulation often increases over time.
The latest milestone will likely contribute to a euphoric atmosphere when the president hosts a controversial dinner tomorrow for 220 of the biggest investors in $TRUMP, his very own cryptocurrency.
It also coincides with Bitcoin 2025 – the biggest crypto conference in the world – which is due to begin in Las Vegas on Tuesday – and growing financial market concerns about the size of the US government’s ballooning debt pile.
Nigel Green, chief executive of global financial advisory firm deVere Group, expects Bitcoin to set new milestones in the coming months.
“$150,000 no longer looks ambitious – it looks cautious,” he wrote in a note.
“Several forces have aligned to propel the market. A cooler-than-expected US inflation print, an easing in trade tensions between Washington and Beijing, and the Moody’s downgrade of US sovereign debt have all steered investors toward alternatives to traditional fiat-based stores of value.
“Bitcoin, often likened to digital gold, is soaking up that demand.
“In a world where sovereign credibility is fraying, investors are shifting decisively into assets that can’t be diluted or manipulated. Bitcoin has become not just a speculative play, but a strategic hedge.”
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