Normalisation of monetary policy in the United Kingdom: The impact on mortgages

The normalisation of the Bank of England’s (BoE) monetary policy, which began in December 2021, helped increase the cost of mortgages to households: it rose from an average of 1.5% in November 2021 to 4.4% in March 2023.

The share of households’ gross disposable income devoted to interest payments more than doubled between the first quarter 2021 (1.5%) and the fourth quarter 2022 (3.6%), reaching a level not observed since the first quarter 2009.

According to BoE statistics, only 12.5% of outstanding household mortgages were floating rate in the first quarter of 2023, suggesting that the proportion of borrowers affected by an immediate rate revision remains modest. Nevertheless, a large proportion of those mortgages classified as "fixed rate” by the BoE have a relatively short initial rate fixation period. In the first quarter of 2023, 84% of outstanding mortgages to households were granted with an initial fixation of up to five years, 3.5% with an initial fixation of just over five years and less than 0.1% with an initial fixation of just over ten years. This implies that the bulk of “fixed-rate” mortgages will be subject to a rate revision in the coming years, and will therefore also be affected by monetary tightening.

However, to the extent that the BoE’s bank rate and the Gilt’s yield could start easing as early as 2024, and that the revision of loan rates would occur only after this easing of market rates had begun, a large proportion of borrowers could escape the effects of the BoE’s and market rates peak on their interest charges.

United Kingdom: household loans secured on dwellings with fixed rate and interest charges as % of gross disposable income

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