Yahoo Finance Bank of England warns UK households may face 2008 financial crisis mortgage strain
The Bank of England (BoE) has warned that the number of UK households struggling to make payments will reach the same levels as in the 2008 financial crisis, if mortgage rates remain at current record highs.
In its quarterly Financial Policy Summary report on Wednesday, it said that households overall are in a stronger position overall compared to before 2008. However, if mortgage financing costs continue to rise, some people may face mortgage pressure, as well as other costs.
“The continued rise in living costs and interest rates will put increased pressure on UK household finances in coming months and make households more vulnerable to shocks,” it said.
“Overnight swap rates, which feed directly into mortgage interest rates, were, at the time of the FPC Policy meeting, priced to peak at around 6%.
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“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.”
The Bank added: “It will be challenging for some households to manage the projected rises in the cost of essentials alongside higher interest rates.”
It comes as the average five-year fixed-rate mortgage on a home rose to 6.29% on Tuesday, the highest since November 2008, up from 5.75% last week, according to Moneyfacts Group. Meanwhile, the two-year fixed-rate deal climbed to 6.43%, the most since August 2008.
This adds an additional £5,000 to annual interest payments for the average household with a two-year fix on a £200,000 mortgage.
More than 2 million households will see their mortgage deals ending next year, meaning they will face higher repayments.
Read more: UK economy shrinks in August as recession fears mount
The central bank also cautioned that the global economic outlook has worsened significantly since July, with company earnings likely to come under strain because of the higher cost of credit.
Higher costs and lower demand will weigh on the earnings for many businesses, especially those with large exposure to energy and fuel prices, the BoE said.
Watch: Bank of England confirms bond-buying programme will end of Friday
Threadneedle Street said on Wednesday that "lessons must be learned" from the pension fund crisis that forced it to intervene in bond markets in recent weeks.
“While it might not be reasonable to expect market participants to insure against all extreme market outcomes, it is important that lessons are learned from this episode and appropriate levels of resilience ensured.”
The Bank was recently forced to launch a £65bn bond-buying programme to calm market turmoil and a falling pound after chancellor Kwasi Kwarteng's tax-cutting mini-budget.
Read more: Bank of England: What will the emergency action actually do?
It stepped in for the third time in a week on Tuesday to try to calm investors and prevent a fire sale of government debt. However, Andrew Bailey warned that this support was set to end on Friday, despite calls for it to be extended.
The Pensions and Lifetime Savings Association said: “A key concern of pension funds since the Bank of England’s intervention has been that the period of purchasing should not be ended too soon, for example, many feel it should be extended to the next fiscal event on 31 October and possibly beyond.”
