More than five million UK households are expected to encounter higher mortgage repayments when they refinance their loans over the next two years, according to the Bank of England's latest Financial Stability Report, published in July 2026. This figure marks a significant increase from the Bank's previous projection of nearly four million households, issued in December. The upward revision reflects the sustained impact of elevated market interest rates, partly attributed to the ongoing conflict in the Middle East, which has driven up the cost of borrowing.
The report highlights a notable rise in mortgage rates, with the average rate on a two-year fixed 90% loan-to-value mortgage now standing at 5.32%. This represents an increase of approximately 75 basis points since the Bank's December Financial Stability Report. The most significant financial impact is anticipated for around 750,000 households due to refinance by the end of this year. These borrowers secured their initial fixed-rate deals before 2022, when borrowing costs were typically below 3%, meaning they face substantial adjustments to their monthly outgoings.
Lenders continue to adjust their mortgage pricing in response to shifts in wholesale funding costs and evolving market expectations for future interest rates. This environment of higher borrowing costs is expected to have broader implications for the UK property market, influencing both residential rental prices and the overall level of activity in property purchases. While acknowledging the increased refinancing burden for many, the Bank of England has reiterated that the UK financial system as a whole remains resilient, despite the challenges posed by higher market interest rates.
Beyond domestic mortgage concerns, the Financial Stability Report also touched upon potential risks within global financial markets. The Bank issued a warning regarding the increased borrowing by hedge funds to invest in artificial intelligence (AI)-related stocks. This trend, according to the Bank, has contributed to rising market valuations and could amplify risks should investor sentiment sour. "Rising equity prices have been driven, in part, by a narrow set of AI-related companies increasing market concentration in some global indices," the Bank stated, highlighting a "significant rise in hedge fund leverage in equity markets, creating risks."
In a separate but related development, the Bank outlined proposals to reduce some regulatory requirements for the UK's largest lenders as part of a broader review of the financial system. These plans would grant systemically important banks greater flexibility to utilise their capital buffers during periods of market stress, with an expectation to rebuild them over time. The consultation on these changes to capital rules aims to allow major lenders to hold slightly lower levels of capital, potentially increasing their capacity to support households and businesses. These adjustments are designed to simplify post-financial crisis regulation while maintaining financial stability and supporting lending to the property sector and the wider economy.