Mortgage blog: Half a million households set to struggle to pay their mortgage

Posted 19 December 2014

The Bank of England has issued a stark warning that almost half a million households would be at risk of falling into mortgage arrears once interest rates start to rise. The Bank’s quarterly bulletin suggests that 480,000 families would run into difficulties if interest rates were to rise by just two percentage points.

While thousands of borrowers may struggle to pay their mortgages if interest rates were to rise, the Bank has reassured homeowners that any rate rises will be gradual.

480,000 families may struggle to pay their mortgage

The Bank of England’s latest quarterly bulletin has revealed that it expects 480,000 households to struggle to maintain their mortgage payments if interest rates were to rise from their current level of 0.5%to 2.5%.

Even in the event of a rise the Bank stressed the proportion of borrowers having trouble paying their home loans should remain well below the levels of the early 1990s as long as incomes rose alongside interest rates.

“Higher interest rates will increase financial pressure on households with high levels of debt,” the Bank said in its Quarterly Bulletin. “The percentage of households with high debt-servicing ratios, who would be most at risk of financial distress, is not expected to exceed previous peaks given the likely paths of interest rates and income.

“But developments in incomes for the households who are potentially most vulnerable will be an important determinant of the extent to which financial distress does increase.”

The findings, from a survey by NMG Consulting, found that the average mortgage debt was £83,000 and that the average household income of mortgage holders in the UK is £43,000. The average household also has unsecured debts of £8,000.

Bank stresses it will raise rates slowly

Since 2009, the base rate has remained at a record low of 0.5%. This has helped many millions of households to keep up repayments on their mortgages although this situation could quickly change when interest rates finally rise.

The Bank has stressed that interest rate rises, when they come, will be gradual and limited in size. Experts now believe that the first increase will not be until the second half of 2015 but the Bank is exploring the impact of tighter policy on households where more than 40 per cent of income is spent on mortgage repayments as these owners are most likely to fall into arrears.

Keith Osborne, editor of Whathouse.com says: “Experts have been talking about the prospect of interest rate rises for a couple of years now and it looks like the first hike will be in late 2015.  The Bank of England is going to have to raise rates slowly to allow millions of households to get used to higher mortgage payments. Even if they do there will clearly be lots of people who simply can’t afford higher payments, especially if wages continue to stagnate.”

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