Financial conditions remain challenging, given increased geopolitical tensions and uncertainties over growth, inflation and interest rates, the Bank of England’s Financial Stability Report for December has revealed.
According to the report, households and businesses remain under pressure from higher borrowing costs, as interest rates are expected to remain higher for longer.
Many households continue to face pressures from recent increases in the cost of living, and as higher interest rates continue to feed through to their borrowing costs.
Around 45% of fixed-rate mortgage deals agreed before the end of December 2021 (when Bank Rate started increasing) are yet to renew.
Since July, however, household income has been a bit stronger than expected and new mortgage rates have fallen slightly.
This means the share of households spending a high proportion of their income on mortgage payments is expected to be lower in future than previously thought.
In addition, the overall share of households who are behind in paying their mortgages has risen slightly, but this remains low by historical standards.
Some borrowers are taking action to limit their monthly repayments, for example through taking out longer-term loans, and UK banks are in a strong position to support customers facing difficulties.
Approximately 90% of mortgage lenders have signed up to the Mortgage Charter, which aims to provide support to borrowers.
The Bank of England also predicted that UK businesses will remain resilient overall to higher interest rates and weak growth.
The most recent data, showing a strong growth in business earnings, supports that view. But some firms are likely to struggle more with borrowing costs. This includes firms in parts of the economy most exposed to a slowdown, or with a large amount of debt.
The number of firms going out of business has continued to rise, albeit from low levels. So far, these have mainly been small firms.
Not all businesses with debt have felt the full impact of recent interest rates rises yet.
But many businesses will not have to renew their fixed-rate loans or other debt before 2025. This will give firms more time to adjust their plans, to account for higher borrowing costs.
Both UK households and businesses have been broadly resilient to the impact of higher interest rates so far.
According to the report, the banking system is strong enough to support households and businesses, even if the economy does worse than expected.
Higher interest payments on loans mean some households and businesses may not be able to make their payments. This increases the risks that banks may face losses on their lending.
The Bank of England reported that the banking system has large capital buffers and other resources to absorb any potential losses, or outflows of cash. Because of these resources, UK banks are strong enough to support households and businesses, even if economic and financial conditions are worse than expected.
Additionally, the amount of new lending by banks remains at low levels.
This is mostly due to reduced demand for loans, given borrowing costs remain high. But as the economy has weakened, some households and businesses have also become riskier to lend to.
This has led to a reduction in the availability of lending for certain types of borrowers.
Reaction:
Graham Cox, founder of Self-Employed Mortgage Hub:
“The Bank of England’s report paints a surprisingly benign picture of household incomes being higher than anticipated, businesses largely adjusting well to a high interest rate environment and limited use of the Mortgage Charter by homeowners.
“Yet it’s hard to feel reassured when the central bank’s record of predictions has been so appalling in recent years.
“So bad, in fact, that they’ve called in Ben Bernanke, former head of the Federal Reserve, to improve their forecasting models.”
Ranald Mitchell, director at Charwin Private Clients:
“Around five million mortgage holders (55%) have already taken the brunt of higher mortgage rates, leaving 45% of mortgage holders on pre-December 2021 rates who have not yet felt the full effect of arguably the biggest shift in the cost of living in a generation.
“Whilst arrears remain low, they are rising as people struggle with basic costs of living and home ownership.
“Businesses, particularly small firms or those that are heavily indebted, are also being hardest hit.
“The cost of their debt may become unmanageable and, coupled with increases in minimum wages, may tip even more over the edge.”
Ken James, director at Contractor Mortgage Services:
“The report doesn’t make for light reading. The tacit message is that we are far from being out of the woods, and that there is a long way to go yet.
“Households and businesses remain under pressure from higher interest rates and the cost-of-living crisis, and the macroeconomic outlook remains subdued.
“Approximately 55% of mortgage accounts have repriced since rates started to rise and around five million more households are going to be affected by 2026.
“As a broker, we are seeing this affecting our clients not just financially but emotionally. We hope that mortgage rates will continue to come down to reduce the impact of rate shock, and that homeowners can start to get some sense that things will improve.”
Carla Hoppe, founder and CEO, Wealthbrite:
“Inflation has been halved but remains stubbornly high. Household finances are continuing to be put under a huge amount of pressure and a neat summary of this report might be: things aren’t quite as bad as they have been but still aren’t as good as they could be.
“The cost-of-living crisis has become a perma-crisis for many. Some of the more concerning details in the report are that the proportion of take-home pay being spent on household costs will continue to rise in 2024.
“With more people opting for longer-term mortgages, the impact on their long-term financial stability may reverberate for years to come.”
Justin Moy, managing director at EHF Mortgages:
“It’s good to see the Bank of England acknowledge that the base rate has taken a ‘lower path’ than expected.
“When coupled with wage inflation, this has meant the very worst has been avoided.
“However, we have still seen significant increases in payments for over 5m borrowers so far, with a similar number still to feel that between now and 2026.
“The ‘Higher for Longer’ mantra for the base rate still rings loud and difficult times lie ahead for both mortgage borrowers and businesses.
“Home purchases are down by a quarter over the past 12 months, and the first-time buyer market is still sluggish.
“Arrears will worsen in 2024, but this only represents about 1% of all mortgages so the effect has been minimal so far.
“I don’t think there are any surprises in the report, but some small improvements that give us some hope for 2024.”
Chris Steele, founder at myTribe Insurance:
“As a small business that has employees and works with a range of freelancers, we’ve experienced a significant increase in expenses in the past 12 months, and with inflation still well above target and the full impact of interest rate changes yet to come, we expect the trend to continue throughout 2024.
“It’s important to us that we look after those that work for us and with us and, therefore, wages and fees paid to external freelancers will likely have to rise further.
“The impact of this on our business is that we have less to invest in new incentives and growth as we’re paying more for the things we’re already engaged with.”
Joshua Gerstler, chartered financial planner, The Orchard Practice:
“Mortgage payments are up for families, the cost of living is up for families, but savings, worryingly, are down for families.
“Although mortgage rates have been creeping down in recent months, those who are coming off ultra-low fixed rates are still seeing a huge increase in their monthly payments.
“Now is the time, if you have not looked at financial planning before, to start, to ensure you are on top of everything now and that your finances will be in the best possible shape in the future.”
