Almost five million UK homeowners are still set to see their mortgage repayments jump by hundreds of pounds over the next three years, as rising interest rates have heightened risks in the global financial markets, the Bank of England has said.

The Bank’s Financial Policy Committee (FPC) also found that British banks are strong enough to support households and businesses even if economic conditions get significantly worse.

About half of mortgage holders have moved to a new fixed-rate deal since interest rates started rising in late 2021, amounting to more than five million households.

But a further five million homeowners are still due to face higher borrowing costs by the end of 2026, the FPC said in its latest Financial Stability Report.

Bank of England policymakers have increased interest rates steadily for nearly two years, with rates currently standing at 5.25%.

A typical mortgage holder coming off a fixed rate between the second quarter of 2023 and the end of 2026 is projected to face a £240 increase in their monthly repayments.

But around 500,000 households could experience a monthly increase of more than £500 by the end of 2024.

Higher borrowing costs have led to arrears increasing slightly, and more people could fall behind on their payments in the coming years, the FPC said.

The latest analysis also showed that the proportion of households’ incomes spent on mortgage payments is set to rise to 9% by the end of 2026, from 6.8% earlier this year.

However, the UK banking system is well capitalised, has high levels of liquidity, and “has the capacity to support households and businesses even if economic and financial conditions prove to be substantially worse than expected,” its report said.

Bank of England stability report
Governor of the Bank of England Andrew Bailey said UK borrowers have so far been ‘resilient’ to higher interest rates (Hannah McKay/PA)

Bank of England governor Andrew Bailey said: “While the full effect of higher interest rates have yet to come through, borrowers on the whole have been resilient to these changes.”

But he added “we recognise that there are those that are more adversely affected”.

Mr Bailey said the number of borrowers falling into arrears was rising for residential and buy-to-let borrowers, but stressed these were still “well below” peak levels in 2008.

Meanwhile, many buy-to-let landlords are passing on higher costs to renters, who are facing rapidly rising rental prices and fewer available properties.

Rising costs could lead to more renters relying on consumer credit, being forced to cut spending, or falling behind on repaying existing debt, the report cautioned.

Risks in the wider economy and global financial markets remain challenging, the FPC said.

US long-dated bond yields – the interest on government debt – have risen since the previous report in July, with UK, European and Japanese yields following a similar pattern.

The property market in China is also experiencing a sharp downturn, which could have a knock-on effect on other areas of the economy.

The financial system has been broadly resilient, but vulnerabilities could “crystallise” amid higher interest rates and sharp movements in asset prices, the committee warned.

“The overall risk environment remains challenging, reflecting subdued market activity, further risks to the outlook for global growth and inflation, and increased geopolitical tensions,” the report concluded.

Mr Bailey added that the war between Hamas and Israel has “increased uncertainty around the economic outlook, particularly with respect to energy prices”.

“If those risks crystallise, it could impact the macroeconomic outlook in the UK and globally,” he said.