Although much focus is on the Bank of England and when it will begin to cut interest rates, a sobering warning has come from the head of the UK’s biggest lender, Lloyds Banking Group.

Chief executive Charlie Nunn says rates between 3.5% and 4.5% will be the ‘new normal’ with no return to the scenario of mortgage rates in the 1.5% to 2.5% range, as seen in recent years. 

“The expectation that markets have is that interest rates won’t get below 3.5% and that means that the new normal for mortgages will be in that 3.5% and 4.5% range. There is going to be a higher cost of borrowing in the economy, probably based on what we can see happening at the moment. In terms of the impact on the broader consumer in the UK, it’ll take longer to feed through” Nunn has told Sky News. 

The base rate has remained at a 16-year high of 5.25% since August 2023, and the next meeting of the Bank of England’s monetary policy committee is on August 1. 

Meanwhile the Bank of England itself is warning the some 3m UK households are to be hit with further increases in mortgage repayments over the next two years.

Its latest Financial Stability Report says “very large increases” of over 50% will apply to the mortgages of around 400,000 households.

Currently some 35% (or three million) of households with mortgages pay with interest rates below 3% and will see an increase between now and the end of 2026.

A typical household rolling off a fixed-rate mortgage in the next 30 months will face a jump of some £180 a month, the BoE suggests. 

The report accepts that most households have already had an increase in their mortgage rates since borrowing costs began rising substantially in 2022. 

The Bank highlights that a growing proportion of households borrow over a longer period of time to minimise monthly repayments but with more debt to service over time.

The BoE is particularly aware of burdens for renters, with the proportion of those behind on rent up to 16.5% in the first quarter of 2024, compared with 15.7% a year ago.

However, overall the Bank insists the overall risk environment for the economy and financial sector is unchanged with the banking sector having “the capacity to support households and businesses even if economic and financial conditions were to be substantially worse than expected.”