Mortgage holders who are trying to decrease painful rises in their monthly payments might risk added financial pain further down the line, officials at the Bank of England have warned.
The Bank’s Financial Policy Committee (FPC) said that, faced with higher interest rates, many homeowners have decided to extend the period over which they pay back their loans.
It added that while that can decrease the pain in the short-term it could increase the burden on these households in the long run.
“Some mortgage holders facing higher interest rates have extended the period over which they are repaying their mortgages, with a small number moving to interest-only deals,” the Committee said in a report released on Tuesday.
It said that the proportion of new mortgages on long-term deals, where the payback period is 35 years or more, has increased from 4% to 12% between the start of 2021 and the middle of 2023.
In this period, the Bank of England’s base interest rate rose from 0.1% to 5%.
Yet the Bank did not sound the alarm over the pain that these households will face. While the proportion of mortgages on longer-term deals had risen, it “remained a small share of total mortgages”.
It also said that while people are spending more of their income on their mortgage, things were worse during the 2007 financial crisis.
“The number of home owners who were behind in paying their mortgages has risen modestly, but this remains low by historical standards,” the Committee said.
The report found that smaller businesses with higher debts are likely to struggle more than their larger peers.
“Larger businesses were in a stronger position going into this period of rising interest rates when compared to previous times of rising interest rates,” it said.
“This is because much of their debt has been fixed at low interest rates. Many of these businesses will not need to borrow at higher rates until at least 2025, which will give them more time to adjust.”