The Bank of England has stated that around three million UK households will face higher mortgage repayments over the next two years due to ongoing high interest rates. According to its financial policy committee, as many as 400,000 homes are expected to experience “very large increases” of more than 50%.

Interest rates have been brought to a near two-decade high of 5.25% in an effort to clamp down on price rises behind the cost of living crisis.

Inflation – the pace of price rises – had been at a 40-year high but now stands at the Bank’s 2% target as the high interest rates made borrowing more expensive and limited spending.

Despite the higher base interest rate set by the Bank, more than a third of mortgage holders (35%) are still paying a mortgage rate of less than 3%, the financial policy committee said on Thursday in its financial stability report.

This is because they signed up for a deal before the energy price shocks which resulted from the war in Ukraine.

When those deals expire, households will need to switch to a more expensive mortgage product.

Most mortgage holders have already adjusted to higher rates since the cycle of increases began in late 2021.

According to the report, a typical household transitioning from a fixed-rate mortgage before the end of 2026 will face an average increase of around £180 per month.

The financial policy committee is responsible for ensuring the UK financial system can withstand economic shocks and risks.

The committee stated that UK lenders remain well-positioned to support households and businesses, even if the economy deteriorates.

Currently, interest rates are expected to decrease in the coming months, with cuts projected for August, September, November, and December.

However, consumers have been cautioned not to anticipate a return to the era of ultra-low interest rates. Charlie Nunn, the chief executive of the UK’s largest lender, informed Sky News that the new normal for mortgage rates is expected to be between 3.5% and 4.5%.