Bad news for most of your clients amid predictions of a monthly £500 rise in payments
Even before Rachel Reeves’ now infamous budget, swap rates had started to rise, putting upwards pressure on mortgage rates for borrowers. Initial property data headlines looked good – but as Mortgage Introducer pointed out at the time, underlying analysis showed some very unsettling housing data points.
And it looks like the bad news is continuing – in a new report the Bank of England has projected that nearly half of UK homeowners will face increased mortgage payments over the next three years, with an estimated 4.4 million households expected to encounter financial strain. The Financial Policy Committee (FPC) has just warned that around 420,000 households could see their monthly mortgage payments rise by £500.
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The report highlights that over a third of mortgage borrowers - 37% - have so far avoided the impact of rising interest rates by locking into fixed deals prior to rate hikes beginning in late 2021. However, about 31% of all mortgage holders, equating to 2.7 million households, are expected to refinance at rates exceeding 3% for the first time by the end of 2027. Notably, 1.5 million households will face this challenge for a second time since rates began climbing – and while this is a tough time for borrowers, it is a great opportunity for mortgage brokers to offer help to clients through these trying times.
The FPC's latest financial stability report revealed that average monthly payments could increase by 22%, adding approximately £146 to typical bills. This figure is slightly lower than earlier forecasts, which predicted an increase of £180. Despite these pressures, 23% of mortgage holders will experience no change in payments, and 27% may benefit from reductions.
Read more: "Silly games" push rates towards peak hit by "lettuce" Liz Truss
In the report, the Bank of England expressed concern over the worsening financial conditions for lower-income households and renters. It noted a decline in savings buffers among low-income groups and a slight rise in payment arrears among renters. “Pressures on renters and lower-income households continue,” the Bank stated. That pressure has been exacerbated by what is seen by many as an attack on the buy-to-let market.
The Bank recently reduced its base interest rate by a quarter-point to 4.75%, raising hopes of long-term relief for households. However, Bank Governor Andrew Bailey warned of heightened uncertainty due to global geopolitical risks. “Geopolitical risk remains elevated, and as we are an open economy with a large financial sector, these risks are particularly relevant to UK financial stability,” he said.
For the first time, the Bank conducted a stress test on the shadow banking sector, which includes hedge funds, pension funds, and other largely unregulated financial institutions. The exercise revealed that these entities could exacerbate market shocks, potentially triggering a £17 billion sell-off of assets in a crisis. The findings highlighted vulnerabilities reminiscent of those that preceded the 2008 financial crash.
The Bank’s Prudential Regulation Authority (PRA) noted that while industry standards have improved the resilience of some shadow banking sectors, such as insurers and money market funds, gaps in regulation remain a concern. The PRA emphasised the need for stricter oversight to prevent systemic risks.
In some good news for mortgage lenders, the PRA announced plans to conduct full stress tests on UK banks every two years instead of annually, citing improved resilience in the banking sector. These tests aim to ensure that banks can withstand significant economic shocks while continuing to support households and businesses.
The FPC also committed to broader exploratory exercises to assess emerging risks, including those linked to climate change and other structural vulnerabilities in the financial system.
The Bank of England also warned that rising trade barriers, such as Trump’s proposed tariffs and geopolitical tensions, could impede global economic growth and make inflationary pressures even worse, potentially destabilising financial markets. The report stopped short of explicitly mentioning political developments, such as the return of Donald Trump to the US presidency, but underscored the potential for increased volatility.
The Bank emphasised the importance of international collaboration to strengthen the financial system's resilience and ensure stability amid evolving global challenges. "A reduction in international policy cooperation could hinder progress in enhancing the financial system's ability to absorb shocks," it stated.
What we should all remember is that at times of uncertainty like this, we should be reaching out to all of our existing and potential clients to remind them of the value of using a mortgage broker to assess the market and provide help when choosing a new mortgage loan.
Shadow banking in the UK encompasses a range of financial activities conducted by non-bank entities that operate outside the traditional banking regulatory framework. These entities, known as non-bank financial intermediaries (NBFIs), provide services similar to those of conventional banks, such as credit provision and liquidity facilitation, but are not subject to the same regulatory oversight. Examples of NBFIs include hedge funds, private equity firms, money market funds, and insurance companies.
The shadow banking sector has experienced significant growth over the past decade. As of the end of 2022, shadow banking entities held approximately $63 trillion in financial assets across major global jurisdictions, representing 78% of global GDP.
In the UK, the sector's value was estimated at £2.2 trillion in 2018, surpassing the annual output of the British economy at that time.
