Mortgage alert as 800k households face struggle to make their payments

Nearly a million households may not be able to pay their mortgage next year, the Bank of England warns.

The central bank estimated that by 2023, some 800,000 families will struggle to pay off their home loans, up from 500,000 last year and the highest number since the run-up to the 2008 financial crisis.

The warning will set alarm bells ringing among millions looking to buy a home. The average mortgage now has an interest rate of more than 6 percent, compared to 2.35 percent a year ago.

This adds an extra £5,000 to annual interest payments for the average family with a £200,000 two-year fixed mortgage, according to the website Moneyfacts.

Lender Aldermore launched new mortgages yesterday, including a two-year fixed rate of 9.28 percent for a borrower with a 10 percent down payment.

And about 2 million households currently on a fixed-income deal will have to re-mortgage by 2024 when their deals expire.

In its report, the Bank’s Financial Policy Committee said rising interest rates mean that 2.8 percent of households, or 800,000 people, will spend 70 percent of their income on housing debt and essentials by 2023.

Households are currently more likely to experience payment arrears. Last year, 1.7 percent of households were in the same position.

In its report, the Banking Commission said: ‘The continued rise in the cost of living and interest rates will put more pressure on UK household finances in the coming months and make households more vulnerable to shocks.’

The cost of borrowing has risen since December, when the Bank began raising interest rates at an unprecedented pace to get a handle on the rising cost of living.

Rates are now at 2.25 percent, but with nearly 40-year inflation at 9.9 percent, further increases are expected.

It is thought that the Bank, led by Governor Andrew Bailey, could raise interest rates by another 0.75 percentage point – or even one percentage point – at its next meeting in November. That could drive up mortgage rates.

The chaos in the markets after Kwasi Kwarteng’s mini-Budget on September 23 has only made matters worse for borrowers.

Government debt or ‘gilded’ prices fell as investors worried about the cost of Kwarteng’s tax cuts. This boosted interest rates on financial instruments known as swaps, which are tied to government bonds.

Mortgages are calculated based on the swap rate – so their costs have exploded as well.

Andrew Wishart, real estate economist at Capital Economics, said: “We expect payment arrears to rise from 0.7 percent of mortgages now to 1.6 percent in 2024.”

Michael Hewson, an analyst at CMC Markets, said, “The risk is that higher rates could push home prices down, leaving many mortgage holders with negative equity, echoing what happened in the 1990s.”

Leeds Building Society said current mortgage rates are the least affordable since records began. Rising house prices and higher household debt mean households are spending a greater share of income on mortgages than ever before.

Today’s average mortgage rate of 6.43 percent is equivalent to an interest rate of 25.7 percent in 1980, Leeds claimed.