Banks will be forced to run onerous affordability checks on their own mortgage customers as the City regulator hits them with more red tape.
Thousands of homeowners will face extra checks when remortgaging under new rules that were quietly implemented in March.
Banks warn that the legislation risks creating a new generation of mortgage prisoners by trapping borrowers who fail the checks.
It comes as nearly four million people still face vast increases in their mortgage bills even though interest rates have nearly peaked, according to a think tank.
Market prices suggest mortgage rates will remain above 4pc until the end of 2026.
As a result, 3.75 million families will be forced to pay a collective £8bn extra in the coming years when they come to remortgage at higher rates, the Resolution Foundation said.
Around 1.6 million homeowners will see an average annual increase of £2,300 in their mortgage bills over the next 12 months.
The new affordability checks put the Financial Conduct Authority further at odds with the Treasury, which wants to reduce bureaucracy in the financial sector.
The watchdog has previously attracted criticism for being slow to authorise new businesses.
Borrowers can normally choose to transfer to a new product with their current lender when remortgaging without having to undergo any further box-ticking.
But banks will now have to assess existing customers if they believe rising interest rates are “material” to their affordability in times of financial turmoil, such as that seen in the wake of the mini-Budget.
The added bureaucracy comes despite Chancellor Jeremy Hunt in December urging banks to be as “flexible” as possible as borrowers face soaring interest rates and the worst cost of living crisis in decades.
Lobby group UK Finance has previously warned the watchdog against implementing the new rules.
In a stern letter, it urged the FCA to drop its plans to impose the extra checks late last year.
“Declining borrowers who are up to date with their payments and seeking to switch their mortgage will create a further cohort of mortgage prisoners,” UK Finance said.
“Requiring an affordability test in this instance has the potential for greater harm, as borrowers will not be able to protect themselves from further increases to variable rates.”
Rising interest rates are prompting increasing numbers of borrowers to stick with their existing lender.
Experts said it suggests that many believe they would fail affordability criteria if switching banks.
Internal product transfers accounted for 33pc of all lending facilitated by Legal & General’s Mortgage Club in 2023.
This was significantly higher than in any of the previous four years, with transfers only accounting for 24pc in 2022.
The FCA has said the number of financially stretched mortgages could rise to 356,000 by June 2024, up from 45,000 last June.
An FCA spokesman added: “Our guidance was issued following consultation and confirms that firms will generally only need to assess affordability if borrowers want to switch to a new rate which is materially more expensive than not switching.”