10 October 2023 , 12:36
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The Bank of England's Financial Policy Committee (FPC) has issued a warning to mortgage holders who are extending their repayment periods in an attempt to mitigate the impact of rising interest rates. While this strategy may provide short-term relief, they warn, it could potentially lead to increased financial strain in the future.
The FPC noted that some homeowners have chosen to extend their loan repayment periods or switch to interest-only deals in response to higher interest rates. "While this eases pressures for these households in the short-term, it could result in higher debt burdens in the future," the committee stated in a report released on Tuesday.
The report also highlighted that the proportion of new mortgages with long-term repayment plans (35 years or more) has risen from 4% to 12% between the start of 2021 and mid-2023. During this period, the Bank of England's base interest rate increased from 0.1% to 5%.
However, the Bank did not express immediate concern over the potential difficulties these households may face, noting that mortgages with longer-term deals still represent a small share of total mortgages.
The report also highlighted that despite the fact that individuals are allocating a larger portion of their income towards mortgage payments, the situation was more severe during the 2007 financial crisis.
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"The number of home owners who were behind in paying their mortgages has risen modestly, but this remains low by historical standards," the Committee stated.
The study also revealed that smaller businesses with higher levels of debt are likely to face greater challenges compared to their larger counterparts.
"Larger businesses were in a stronger position going into this period of rising interest rates when compared to previous times of rising interest rates," the report noted.
This is put down to the fact that a significant portion of their debt has been fixed at low interest rates. As a consequence, many of these businesses will not need to borrow at higher rates until at least 2025, providing them with additional time to adapt.
* An AI tool was used to add an extra layer to the editing process for this story. You can report any errors to [email protected]