Households and businesses yet to feel full impact of higher rates

Households and businesses have been resilient in the face of rising interest rates, the Bank of England said in its latest Financial Stability Report.

However, households and businesses remain under pressure from higher borrowing costs, as interest rates are expected to remain higher for longer. The report says that households continue to face pressures from recent increases in the cost of living, and as higher interest rates continue to feed through to their borrowing costs. Around 45% of fixed-rate mortgage deals agreed before the end of December 2021 (when Bank Rate started increasing) are yet to renew.

Since July, however, household income has been a bit stronger than expected and new mortgage rates have fallen slightly. This means the share of households spending a high proportion of their income on mortgage payments is expected to be lower in future than we had previously thought.

The overall share of households who are behind in paying their mortgages has risen slightly, but this remains low by historical standards. Some borrowers are taking action to limit their monthly repayments, for example through taking out longer-term loans, and UK banks are in a strong position to support customers facing difficulties. Approximately 90% of mortgage lenders have signed up to the Mortgage CharterOpens in a new window, which aims to provide support to borrowers. As yet, the take-up by borrowers has been limited. 

The Bank of Enland expects businesses to be resilient overall to higher interest rates and weak growth. The most recent data, showing a strong growth in business earnings, supports that view. But some firms are likely to struggle more with borrowing costs. This includes firms in parts of the economy most exposed to a slowdown, or with a large amount of debt.

The number of firms going out of business has continued to rise, albeit from low levels. So far, these have mainly been small firms. Not all businesses with debt have felt the full impact of recent interest rates rises yet. But many businesses will not have to renew their fixed-rate loans or other debt before 2025. This will give firms more time to adjust their plans, to account for higher borrowing costs.