The Bank of England says it expects the proportion of income UK households spend on mortgage payments to remain below levels seen during the financial crisis.
Its latest Financial Stability Report declared that squeezed households were proving resilient in the face of challenges posed by rising living costs and interest rate hikes to tackle high inflation.
But it warned it would take time for the impact of rate increases to feed through.
Just a day after data from Moneyfacts revealed average two-year fixed mortgages had hit a 15-year high, the bank’s financial policy committee said lenders and borrowers alike were well placed to manage the additional costs.
“Although the proportion of income that UK households overall spend on mortgage payments is expected to rise, it should remain below the peaks experienced in the Global Financial Crisis and in the early 1990s”, the report said.
Bank rate has been raised consistently since December 2021 in a bid to get a grip on inflation, first caused by economies reopening after the COVID pandemic.
The pace of price growth accelerated in the wake of Russia’s invasion of Ukraine.
While the bank cannot control things like energy and food prices, market expectations for bank rate have increased in recent months as inflation has proved more sticky than anticipated.
The bank has highlighted pressure from “unsustainable” wage growth and companies looking to rebuild profitability.
Rising rate expectations have raised lenders’ funding costs, leading to the pressure on mortgages.
Bank industry body UK Finance estimates 800,000 households will need to refinance on to more expensive mortgages in the second half of 2023, and a further 1.6 million in 2024.
The bank’s report said the country’s eight largest lenders had all passed its annual stress test, declaring they had enough capital to cope with higher rates.
It added: “Given robust capital and profitability, UK banks have options to offer forbearance and limit the increase in repayments faced by borrowers, including by allowing borrowers to vary the terms of their loans.
“There are now stricter regulatory conduct standards for lenders with respect to supporting households in payment difficulties.
“And on 23 June, the principal mortgage lenders, the chancellor and the Financial Conduct Authority (FCA) agreed new support measures for residential mortgage holders.”