Worse financial pain is to come, as many people have not yet felt the full impact of the increased cost of borrowing, the Bank of England has said in one of its latest health checks of the UK’s financial system.
Higher interest rates, currently at 5.25% after a run of 14 hikes, have not yet been passed on to all borrowers, the Bank said in its quarterly Financial Policy Summary, published on Tuesday morning.
Households have been spending more of their money on paying off debt (such as credit card bills or mortgages) and the proportion of household income going on those payments is to rise through next year, the report said.
The Bank noted that the amount of debt owed by consumers is below the peak that occurred in 2007 and interest rates would need to rise significantly for that high to be reached again.
But some effects of high interest rates have already been seen in the mortgage market: the number of people on long-term, 30-year or more mortgages has grown eight percentage points in just two years, from 4% of all mortgages in 2021 to 12% this year.
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The mortgage crisis has put people across the country in financial difficulty.
As a result of more expensive mortgage bills there’s been a “modest” increase in the number of people in arrears, though figures are still “low in historical terms”, the Bank said.
Only a “small number” have moved to only pay the interest on their mortgages, figures showed.
The Bank has evidence that poorer people are turning to credit cards to make ends meet and fund day-to-day expenditure.
This group of people are more likely to be renters, as they have less money, and are less likely to be mortgage holders.
Renters, who make up the majority of the UK population according to Sky News analysis, are continuing to see their rents rise at fairly high levels.
Despite the tough economic conditions for many, the report said the UK banking system remains able to support households and businesses even if conditions are worse than expected.
As part of this, the report said the system is resilient to geopolitical risks, regardless of the form of the risk. As the result, the Bank sees the ongoing Israel-Hamas conflict as not having a significant impact on the overall financial wellbeing of the country.