(Bloomberg) -- The Bank of England said that far fewer households will struggle to meet their mortgage payments, suggesting a limit to defaults on home loans and support for the ailing property market.

Rising wages in real terms and a drive by households to pay down their debts have helped ease the pain families are feeling when they come to refinance their mortgages, the central bank said in its Financial Stability Report on Wednesday.

The BOE said that some 440,000 households will find it difficult to meet their debt repayments by the end of 2024, as defined as having a higher mortgage cost of living adjusted debt-servicing ratio. That’s down substantially from its July estimate of 650,000 by the end of this year and much lower than levels seen in the financial crisis. 

A smaller squeeze on households from the mortgage shock could brighten the outlook for the UK economy after concern about consumers tighten their belts revived talk about a possible recession. Mortgage rates have cooled in recent months after investors started betting the BOE will cut its benchmark lending rate next year.

It’s also a rare sign of strength in the property market, where house prices have fallen from their peak in late 2022. While economists had expected a drop of 10% or more for this year, prices are now only a little lower, and fewer are anticipating a sharp downturn.

Overall, the household debt to income ratio was 139% in 2023, the lowest level since 2002. That reflects rising real incomes and efforts by households to reduce their debt.

However, BOE Deputy Governor Sarah Breeden, who oversees risks to financial stability, said there’s still a lot of pain for households in the pipeline since much of the increase in interest rates over the past two years has yet to feed through.

“The process of the household and corporate sector adjusting is only partway through,” Breeden said in the press conference following the release of the report. “There’s a lot of fixed rate debt out there. Five million households have had their mortgage repriced so far, but there’s another 4 million to come, and that is really important to remember.”

The BOE said that households who are forced to refinance from a fixed rate from the second quarter to the end of 2026 will see their monthly repayments jump by £240 ($303) on average, or 39%.

It came as new data from UK Finance showed mortgages in arrear jumping by a quarter to hit their highest level in almost seven years as the pressure on households from soaring borrowing costs mount. 

UK Finance said the number of mortgages in arrear surged to over 99,000 in the third quarter, up by 24% year-on-year. It was the highest number since the final quarter of 2016. UK Finance said overall mortgage lending remains weak.

“While we expect them to increase, mortgage arrears are likely to stay well below the 2008 peak,” BOE Governor Andrew Bailey said.

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