An additional one million homeowners across the United Kingdom are expected to face higher mortgage repayments by the end of 2028 than previously forecast, according to the latest Financial Stability Report published by the Bank of England. The revised outlook reflects the economic consequences of the conflict involving Iran, which disrupted global energy markets, intensified inflationary pressures, and delayed expectations for lower interest rates.
The central bank now estimates that more than five million homeowners will experience an increase in monthly mortgage costs over the coming years, compared with an earlier projection of approximately four million made in December. Although the expected increases are generally smaller than those experienced during the recent period of rapid interest rate hikes, the report highlights that millions of households will continue to face financial pressure as fixed-rate mortgage deals expire.
Bank Of England Revises Mortgage Outlook
According to the Bank of England, around 5.1 million mortgage holders are expected to refinance onto more expensive borrowing arrangements before the end of 2028. The updated figures reflect changing economic conditions that emerged after the escalation of geopolitical tensions in the Middle East, which altered expectations for inflation and monetary policy.
Many borrowers had anticipated that declining inflation would allow the Bank of England to reduce interest rates more aggressively, resulting in cheaper mortgage products over the coming years. However, higher energy prices caused by global supply disruptions have weakened those expectations, meaning borrowing costs are now projected to remain elevated for longer.
Despite the revised forecast, the Bank noted that the financial impact on most households should be considerably less severe than the sharp increases witnessed between 2022 and 2024, when interest rates rose rapidly to combat inflation.
Average Mortgage Increases Expected To Remain Moderate
The report estimates that homeowners moving from existing fixed-rate mortgages over the next two years will typically see their monthly repayments increase by around £45.
This compares favourably with borrowers who refinanced during the peak of the recent interest rate cycle, many of whom experienced average monthly increases of approximately £120 after leaving lower fixed-rate products.
However, not all households will experience only modest increases. The Bank highlighted that approximately 750,000 homeowners currently benefiting from mortgage rates below 3% are expected to refinance during this year. These borrowers are projected to face significantly larger repayment increases averaging around £170 per month, reflecting the substantial gap between their existing rates and today’s lending environment.
The report illustrates that while overall mortgage pressures are easing compared with previous years, certain groups remain particularly vulnerable as historically cheap mortgage products continue to expire.
Fixed-Rate Borrowers Continue To Dominate UK Mortgage Market
Fixed-rate mortgages remain the dominant borrowing option in the United Kingdom, with more than 80% of mortgage customers currently protected from immediate interest rate fluctuations.
These mortgages allow borrowers to lock in a fixed interest rate for an agreed period, most commonly two or five years. Once the fixed term expires, homeowners must either refinance or move onto a lender’s standard variable rate, which is often considerably more expensive.
The Bank estimates that more than two million borrowers whose two-year fixed-rate deals expire before the end of 2028 will refinance at interest rates broadly similar to their existing products. While these households are unlikely to experience substantial increases in repayments, they are also no longer expected to benefit from the significant reductions that economists had previously forecast.
Iran Conflict Alters Economic Expectations
A major factor behind the revised mortgage outlook is the economic disruption caused by the conflict involving Iran.
The fighting resulted in the temporary closure of the Strait of Hormuz, one of the world’s most strategically important shipping routes. The waterway normally carries around one-fifth of global oil and gas supplies, making any disruption particularly significant for international energy markets.
The interruption in energy supplies drove oil and natural gas prices higher, placing renewed upward pressure on inflation across many economies.
As inflation risks increased, financial markets adjusted expectations for central bank policy, anticipating that interest rates would remain higher for longer than previously expected. Commercial lenders subsequently reflected those expectations in mortgage pricing, increasing borrowing costs for both first-time buyers and homeowners seeking to refinance.
According to financial data provider Moneyfacts, the average two-year fixed mortgage rate climbed from 4.83% at the beginning of March to a peak of 5.90% in April before easing slightly to approximately 5.49%.
Although rates have moderated since their peak, they remain substantially above the levels many homeowners secured several years ago.
Economic Challenges Await Incoming Government
The Bank of England’s revised projections arrive as the United Kingdom prepares for a political transition, with Andy Burnham widely expected to succeed Sir Keir Starmer as Labour leader and Prime Minister.
The incoming administration faces mounting economic challenges beyond the mortgage market.
Earlier this week, the Office for Budget Responsibility (OBR) warned that the country’s long-term public finances remain under considerable pressure. In its latest Fiscal Risks and Sustainability Report, the fiscal watchdog cautioned that public debt could approach 300% of gross domestic product over the next five decades without meaningful policy intervention.
The OBR stated that maintaining debt at current levels would require spending reductions equivalent to the entire education budget or tax increases comparable to total corporation tax revenues.
These warnings underline the difficult fiscal environment confronting policymakers as they attempt to balance public spending with continued economic stability.
Lower-Income Households Face Greater Financial Pressure
While mortgage holders remain an important focus of the Bank’s assessment, the report also identifies lower-income households as particularly exposed to rising living costs.
Families with limited disposable income typically allocate a greater proportion of their earnings to essential expenses, including housing, utilities and food. Consequently, increases in energy prices have a disproportionately larger impact on their financial resilience.
Renters are also considered vulnerable because they are less able to absorb rising living costs and often possess fewer financial reserves than homeowners.
Nevertheless, the Bank concluded that household finances across the United Kingdom remain broadly resilient despite continued global uncertainty.
Overall levels of household debt remain below historical averages, and while financially vulnerable groups continue to face significant challenges, the central bank does not currently anticipate widespread financial distress capable of sharply reducing consumer spending or threatening broader financial stability.
AI Risks Also Feature In Financial Stability Report
Beyond household finances, the Bank’s latest Financial Stability Report also highlights emerging risks associated with artificial intelligence.
Officials warned that rapid advances in AI technologies have heightened cybersecurity threats as businesses become increasingly dependent on sophisticated digital systems. The report also expressed renewed concern that valuations of companies operating within the artificial intelligence sector may have become increasingly stretched, raising the possibility of excessive market speculation.
The central bank issued similar warnings in its previous Financial Stability Report, indicating that policymakers continue to monitor the sector closely for signs of financial instability.
Outlook Remains Uncertain
The latest Bank of England assessment illustrates how international geopolitical events continue to influence domestic economic conditions. While the expected increase in mortgage costs is now less severe than during the height of the inflation crisis, millions of homeowners remain set to pay more as existing mortgage deals expire.
With interest rates expected to remain relatively elevated, global energy markets still vulnerable to disruption, and broader fiscal pressures weighing on the UK economy, borrowers are likely to continue facing a challenging financial environment over the coming years. Policymakers, lenders and households alike will be closely watching inflation trends and future monetary policy decisions, as these will determine whether mortgage affordability begins to improve or remains under sustained pressure through the remainder of the decade.