The Bank of England's Financial Stability Report anticipates a rise in households grappling with high debt servicing ratios and an uptick in consumer credit usage.
Despite the current cost-of-living pressures and increased borrowing costs faced by households and businesses, the full impact of higher interest rates is yet to be fully realised. The Bank expects businesses to withstand higher interest rates and weak growth, but smaller businesses with relatively larger debts may face greater challenges.
The report also expresses concerns about the growing number of homeowners opting for mortgages with terms of 35 years or longer. This trend is driven by borrowers attempting to mitigate the effects of higher interest rates. However, the Bank cautions that while longer mortgage terms may provide short-term relief, they could lead to greater debt burdens in the long run.
Consumers are responding to higher interest rates and living costs by taking out longer mortgages and increasing credit card spending, potentially setting the stage for future debt issues. Over the past three months, some households have increasingly relied on credit cards to make ends meet.
Prospective homebuyers are also adjusting to financial pressures by opting for longer-term mortgages. The proportion of mortgages lasting 35 years or more has risen from 4% in the first quarter to 12% in the second quarter.
The Financial Policy Committee (FPC) has observed a slight increase in borrowers falling into arrears, albeit from low levels, and expects this trend to continue. Banks have concurrently tightened their lending practices due to concerns about the economic outlook.