UK mortgage payers are being cautioned by the International Monetary Fund (IMF) to prepare for even higher borrowing costs in the coming months. This warning comes as home loans in the UK reach their most expensive point in 15 years.

The IMF, in its annual assessment of the economy, expressed its support for the Bank of England’s stringent actions to control inflation. With pay growth hitting its fastest pace in over two decades, the IMF emphasized the need for the central bank to take necessary measures.

This cautionary note from the IMF coincided with two-year fixed mortgage rates reaching their highest level since the 2008 global financial crisis. Members of the Treasury committee were informed by mortgage lenders that more borrowers could face financial strain in the near future.

Since December 2021, the Bank of England’s monetary policy committee has raised interest rates from 0.1% to 5% through 13 successive increases. City analysts predict an additional 0.5-point rise in August, following the release of official figures showing a 7.3% annual growth in regular pay.

The IMF stated, “Should inflationary pressures show signs of further persistence, the [Bank of England’s] policy rate may have to be raised further and would need to remain higher for longer to durably lower inflation and keep inflation expectations anchored.”

Speculation about official interest rates eventually surpassing 6% and pushing mortgage rates well beyond 7% was fueled by the Bank’s governor, Andrew Bailey. In a recent speech, Bailey highlighted that the current levels of wage and price increases are incompatible with the government’s 2% inflation target.

According to data provider Moneyfacts, mortgage rates have already exceeded the levels temporarily reached after the September 2021 mini-budget by Liz Truss. If interest rates continue to rise, there could be a reversal in the trend of customers falling behind on their monthly payments. On Tuesday, the typical two-year fixed mortgage rate stood at 6.66%, up from 6.63% on Monday.

Charlotte Harrison, interim chief executive of Skipton Building Society, warned that over the next six months, more customers could experience financial stress. This prediction comes as approximately 1.4 million mortgage customers are expected to switch to new contracts at higher rates this year. Additionally, higher interest rates would exert downward pressure on house prices, which peaked last summer, and increase the risk of recent borrowers owing more than their homes’ current value.

Henry Jordan, a director at Nationwide’s home loan division, shared that mortgage payments for the building society’s borrowers have increased by a third on average after signing new deals, resulting in an additional £235 per month.

However, major bank executives indicated that customers’ ability to afford higher interest rates was assessed before approving home loans. Bradley Fordham, Santander UK’s mortgage director, stated, “We’ve affordability stress-tested at a higher interest rate… at about 6%… at the time of application. We’ve understood that customers can bear a higher interest rate, and that seems to be bearing out at this moment in time.”

To support struggling borrowers, dozens of UK banks, including HSBC, Lloyds Banking Group, NatWest, Santander, and Nationwide, recently signed the chancellor’s mortgage charter. This commitment entails offering forbearance options such as mortgage term extensions and interest-only payment periods. However, if rates surpass 6%, interest-only payment plans would no longer provide significant relief.

Jordan explained that extending the mortgage term would reduce the monthly payment increase from £250 to £134 for Nationwide’s customers. Converting to interest-only payments could also offset the increase. However, Jordan added that options like interest-only would become insufficient once interest rates reach approximately 6.25% to 6.5%.

While the extent of strain on borrowers remains uncertain, lenders are expected to allocate more funds in the second quarter to protect themselves against potential defaults. Santander’s Fordham mentioned that provisions would likely increase slightly in line with arrears as customers transition to different stages.