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Five million households face paying an extra £240 a month on their mortgage bills by the end of 2026 as the last of cheap fixed-rate loans come to an end, the Bank of England has warned.
The anticipated spike comes after 5.5 million mortgage holders have already moved onto more expensive deals since the Bank started raising rates at the end of 2021.
The Bank’s base rate now stands at 5.25pc, up from 0.1pc two years ago.
Its latest analysis shows that households are on track to spend around 9pc of their incomes on servicing mortgage debt by 2026, up from 6pc before the Bank started its cycle of rate rises.
However, officials on the Financial Policy Committee (FPC), led by Governor Andrew Bailey, are less worried than they were earlier in the year because mortgage rates have started to fall and pay is rising faster than expected.
It means that overall pressure on household finances will not be as bad as feared when mortgage rates peaked in the summer.
Since the FPC’s last meeting in October, “quoted fixed interest rates had moderated slightly and real income had increased by more than expected”, policymakers said.
The FPC added: “These factors were likely to have reduced somewhat the future mortgage debt service burden many households would face despite a slightly higher expected increase in unemployment.”
The category of households under most pressure are those for whom the cost of basics plus mortgage payments amounts to more than 70pc of their incomes.
This currently accounts for around 1pc of all households, although the Bank expects this to rise to 1.6pc by the end of 2024. This will be the equivalent of 440,000 households.
Despite the increase, this is less than the 2.3pc previously predicted by the Bank and is less than half the 3.4pc peak during the financial crisis.
However, the number of homeowners falling behind on mortgage payments has risen to 1pc, the Bank said, although this “remained low in historical terms”.
While the pain from the mortgage crunch is less than previously feared, risks are growing in the commercial property sector as home working combined with the demands of net zero are hammering landlords.
The FPC said “a number of headwinds” are battering commercial real estate globally, which is “putting downward pressure on prices and making refinancing challenging”.
It said: “These included structural challenges including the post-pandemic shift to more remote working, the ongoing shift from physical to online shopping, and the cost of upgrading buildings to reduce carbon emissions, as well as cyclical pressure. UK commercial real estate prices have already fallen by nearly 20pc since their mid-2022 peak.”
This is higher than the 10pc drop seen in the eurozone and the US.
The Bank said the drop-off “could present a risk to lenders” if prices keep falling.
Other businesses that appear vulnerable to higher financing costs include wholesale trade companies, construction businesses and the hospitality trade.
All of those industries have a large share of businesses for whom debt servicing costs are rising faster than earnings.
The Bank of England is also worried about funding conditions in financial markets.
The availability of risky debt, including high-yield bonds, leveraged loans and private credit, has doubled since 2015 to around 25pc of all market-based corporate debt globally, amounting to almost $10 trillion.
This could increase risks for borrowers as they refinance loans at much higher costs.
The Bank said: “Some highly leveraged companies could struggle to refinance their debt as a result of higher rates and market perceptions of higher credit risk, which could lead them to reduce investment and employment, and in some cases default.”