Mortgage costs for four million set to surge by £3,000 next year, warns Bank of England | Personal Finance | Finance

Homeowners on a fixed-rate deal due to expire by the end of 2023 face a £3,000 hike – around £250 every month on average as they switch to higher interest rates.

This means the typical household in this situation will be paying 17 per cent of pre-tax income on servicing the mortgage – up from 12 per cent.

Payments will increase by at least £100 for 2.7m mortgage payers.

And more owners are set to fall behind with their payments as they also struggle with the cost-of-living crisis, according to the Bank’s latest Financial Stability report.

Sam Richardson, Deputy Editor of Which? Money, said: “Thousands of pounds extra in mortgage repayments will leave many households facing a financial cliff-edge next year.

“If you’re struggling to pay your bills, talk to your lender about what support it could offer.

“This could include a temporary payment holiday, lengthening the term of your mortgage to cut your monthly instalments or switching you temporarily to interest-only repayments.

“Banks and building societies should be willing and able to offer help.”

The average rate for a new two-year fixed-rate 75 per cent loan to value mortgage has increased to six per cent from below two per cent over recent years.

House prices have started to fall as cost of living pressures and higher mortgage rates bite.

In its twice-yearly Financial Stability Report (FSR), the Bank said: “Pressures on household finances will increase over 2023.

“The cost of essential goods is expected to remain high, and around half of owner-occupier mortgagors will experience increases in mortgage costs.”

Prices fell 2.3 per cent in November compared to the previous month in the largest drop since 2008 as activity in the market begins to slow, according to lender Halifax.

However, households will be spared from being pushed into negative equity by the pandemic surge in house prices.

Governor Andrew Bailey told a press conference that the ‘economic environment is challenging’ but stressed that households are better placed to deal with this than during the 2008 ‘Credit Crunch’.

He said: “We have high inflation, demand is slowing and interest rates have been rising.

“Household and business finances are under greater strain.

“Overall however, both households and businesses are more financially resilient than they were in previous periods of stress.”

He also insisted the financial system can cope with the extra strain as UK banks and building societies are prepared, with strong balance sheets and high profits.

Threadneedle Street did voice concern about the non-bank sector – saying it will launch a stress test next year following the near-collapse of some pension funds as gilts prices tumbled.

The stark analysis came as official figures showed real-term pay falling at the fastest rate in 13 years.

As the country is wracked by a wave of strikes, official figures showed total wages declining by 3.9 per cent a year in the quarter to October, taking CPI inflation into account.

That was the worst figure since the aftermath of the credit crunch in 2009.

Meanwhile, unemployment ticked up to 3.7 per cent and there are signs that struggling older people are returning to the jobs market.

The proportion classed as ‘economically inactive’ decreased by 0.2 percentage points.

Job vacancies also dipped slightly, although they remain at a historically high level, reflecting the tightness in the labour market.

Chancellor Jeremy Hunt said the grim figures showed ‘difficult decisions’ are needed, warning that demanding huge pay rises will only ‘prolong the pain for everyone’ by embedding inflation.

More work needs to be done to prevent non-banks posing a risk to UK financial stability, after gilt yields surged at historic rates in September and the Bank was forced to step in, the BofE said.

Non-banks are defined as any financial institution that is not a bank and includes pension funds and liability-driven investment funds.

The Bank already stress tests the UK’s biggest banks to monitor their resilience against deteriorating economic conditions.