Mortgage blog: Three million will be forced to work more if interest rates rise
New research from the Office for Budget Responsibility (OBR) has shown that almost three million households will be forced to work longer hours or cut their spending if interest rates were to rise by just 2.5%. The stark warning comes as the prospect of a base rate rise next spring intensifies.
Almost one quarter of mortgage borrowers would have to cut spending or work more
Treasury forecasters believe that almost three million households will be left in a vulnerable financial position even if interest rates were only to rise by a relatively modest amount. An increase of 2.5 percentage points on a typical £150,000 repayment mortgage would increase monthly payments by an estimated £230 a month. For interest-only mortgages, of which there are over 11m in the UK, monthly payments could jump from around £180 a month to as much as £500.
The OBR figures are based on a Bank of England survey which asked people when they would have to "take some kind of action to find extra money" to cope with higher borrowing costs. "Faced with a larger rise in debt servicing costs, households could change their behaviour in a number of ways," the OBR said, suggesting mortgage holders could cut spending, work longer hours, or request a change to their mortgage.
The OBR estimated that 24% of people would have to increase their income, cut their outgoings or refinance their loan if mortgage rates rise as expected.
String of warnings about the prospect of mortgage rate rises
The OBR report follows other warnings about the potential impact on millions of mortgage borrowers of rising rates. Mark Carney, the governor of the Bank of England, recently suggested that higher house prices could force borrowers to take on ever-larger debts, potentially leaving "a large number of households in vulnerable positions".
Nationwide, one of the country's biggest lenders, has also warned that that the long period of low rates has left a generation of house buyers with no experience of higher borrowing costs, leaving some at financial risk.
Keith Osborne, editor of Whathouse.com, says: "Even if interest rates were to rise slowly and by small amounts the impact on millions of households will be significant. I would urge anyone who is worried about whether they will be able to continue to afford their home loan to get professional advice now about their options."
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