The proportion of households struggling to make their mortgage payments is set to reach its pre-financial crisis peak by the end of next year, the Bank of England has warned.
The Bank’s Financial Policy Committee (FPC) said households with high cost-of-living-adjusted mortgage debt-service ratios would soar if interest rates rise in line with market expectations.
The category measures those who spend more than 70% of their take-home pay on mortgages and other essentials.
These households will struggle to meet their payments and will have to cut spending, and could default on their loans.
It will be difficult for some households to manage projected increases in the cost of basic necessities as interest rates rise
“Assuming rates follow this implicit market path, the share of households with high cost-of-living-adjusted mortgage debt-service ratios would increase by the end of 2023 to the highest levels reached before the Global Financial Crisis (GFC),” the bank said.
“However, households are in a stronger position than when approaching the GFC, so UK banks are less exposed to household vulnerabilities.”
There are fewer households with mortgages than at the time of the GFC and Britain’s household debt-to-income ratio is well below where it peaked before the crash of 2008.
“Nevertheless, it will be difficult for some households to manage projected increases in the cost of basic necessities as interest rates rise,” the Bank said.
He came as the Bank warned that the outlook for the global economy has deteriorated significantly in recent months.
The Bank said recent problems in the UK government debt market had spilled over and were impacting global markets.
“The global economic outlook has continued to deteriorate significantly, and more than expected, while geopolitical risks have remained heightened since July,” the FPC said.
He added that interest rate hikes would also lead to higher costs for businesses.