Bank of England warns four million people face higher mortgage bills

BoE report says households and businesses more resilient than before global financial crisis of 2008

A protest against austerity in London. The average monthly mortgage payment will reach £1,000 ($1,228) next year, the Bank of England said. Bloomberg

The Bank of England has said rising inflation and borrowing costs are placing “significant pressure” on households and businesses.

However, in its latest Financial Stability report, the BoE said that households and businesses are much more resilient than they were before the global financial crisis of 2008.

Nonetheless, about four million households are likely to face higher mortgage payments next year, with the average monthly mortgage payment rising to £1,000 ($1,228) from £750 — equivalent to about 17 per cent of pre-tax income.

“Falling real incomes, increases in mortgage costs and higher unemployment will place significant pressure on household finances,” the BoE said in its half-yearly Financial Stability Report.

The BoE's Financial Policy Committee predicted that 2.4 per cent of UK households will have mortgage payments they cannot afford.

That is a much lower percentage than following the 2008 financial crisis and the recession of the early 1990s. In part, this is because of the more widespread use of fixed-term mortgages and tighter lending requirements that have emerged in the past decade.

“The FPC continues to judge that banks are resilient, even if conditions were to be worse than forecast,” BoE governor Andrew Bailey wrote in a letter to UK Chancellor Jeremy Hunt accompanying the report.

House price fall

Last week, the Halifax House Price survey showed November experienced the biggest monthly house price fall since 2008. Meanwhile, the trade body UK Finance forecast on Monday that mortgage lending would fall by almost a quarter next year.

It comes as the UK suffers its highest rate of inflation for 41 years — standing at 11.1 per cent — with a prolonged recession predicted.

“Sharp increases in prices, including of energy, tighter financial conditions and the worsening outlook for growth and unemployment will continue to weigh on debt affordability for households, businesses and governments globally,” the BoE said.

Banks remain well-placed

The Stability Report also points to the resilience of the UK banking sector in the current economic conditions.

The relatively strong position of the UK banks means they will be able to support creditworthy households and businesses during the current downturn, the BoE said. Household debt is seen as much lower and less risky than it was in previous decades, mainly due to the stricter regulations put in place over the past 14 years.

“The greater resilience of banks, and the higher standards around conduct, also means they are expected to offer a greater range of forbearance options. As such, the increased pressure on UK households is not expected to challenge directly the resilience of the UK banking system,” the BoE said.

“Major UK banks’ capital and liquidity positions remain strong and pre-provision profitability has increased. They are therefore well placed to absorb shocks and continue meeting the credit needs of households and businesses.” the BoE added.

Speaking after the report was published, Mr Bailey said: “I would, however, caution that the notion we're past the financial crisis, and we therefore don't need the regulations that we had post the financial crisis, I would not go along with that view.

“Because I think we have to understand clearly why the banking system is much more robust today than it was then.”

Cryptocurrencies

The BoE also warned of the dangers of investing in riskier assets like cryptocurrencies, noting the recent collapse of the cryptocurrency trading platform FTX.

The BoE pointed out that while the UK's financial stability is not affected by high-risk cryptoassets, examples like the FTX saga do pose a potential for systemic risk and a broader fallout, should things go wrong.

“Financial institutions and investors should take an especially cautious and prudent approach to any adoption of these assets until the necessary regulatory regimes are in place,” the BoE said.