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The proportion of households struggling to make their mortgage payments is expected to increase to 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-servicing ratios will soar if interest rates increase in line with what the market expects.
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.
“Assuming rates follow this market-implied path, the share of households with high cost of living-adjusted mortgage debt-servicing ratios would increase by end-2023 to around the peak levels reached ahead of the global financial crisis (GFC),” the Bank said.
“However, households are in a stronger position than in the run-up to 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 the ratio of debt to income of British households is well below where it peaked before the 2008 crash.
“Nevertheless, it will be challenging for some households to manage the projected rises in the cost of essentials alongside higher interest rates,” the Bank said.
It 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 market for UK Government debt had spilled over and were impacting global markets.
“The global economic outlook has continued to deteriorate significantly, and by more than had been expected, while geopolitical risks have remained heightened since July,” the FPC said.
It added that interest rate increases will also push up costs for companies.
Households struggling with mortgages ‘might reach 2008 peak next year’