Mortgage Blog: One in ten households with a mortgage at risk when interest rates rise

Rises in interest rates could trap over two million households in a mortgage agreement they are struggling to pay, according to a new report. The Resolution Foundation found that around 2.3 million householders are set to become ‘mortgage prisoners' by 2018 - either unable to switch to a better deal to protect themselves against rate rises or seeing over a third of their disposable income go on their mortgage payments.

Up to 3.5 million households could end up as ‘mortgage prisoners'

The Resolution Foundation - an independent think-tank - says that around 770,000 households are ‘doubly exposed' when interest rates rise. This is because they are likely to have low equity in their home (less than five per cent), be self-employed or have an interest-only mortgage - three factors which are less attractive to lenders.In addition, it would only take a small rise in interest rates for these households to be paying more than a third of their disposable income on their mortgage by 2018.The report says that the total number at risk of becoming ‘mortgage prisoners' could be as high as 3.5 million although it acknowledged that some of these borrowers will be able to negotiate new terms with their lender.

However, those with low equity or interest-only mortgages will find it difficult to access new mortgage deals, especially as stricter lending conditions have just come into force.

Matthew Whittaker, the Foundation's chief economist and the report's author, said: "Many borrowers have enjoyed spectacular savings over recent years, with mortgage rates falling to historic lows, and most will be able to ride the tide of gradually rising interest rates.

"But for around one in four, even modest rate rises could create financial difficulties. Those at greatest risk are members of this group who also find themselves unable to access the best deals in the market today.

"Almost one in 10 households are doubly exposed: facing the prospect of their mortgage becoming increasingly unaffordable in the future and with the market offering them limited, if any, choice today."

Keith Osborne, editor of new homes portal whathouse.co.uk, said: "With interest rates remaining low I would urge anyone who is worried about the prospect of rate rises to contact their lender or an independent broker to establish what options are open to them.

"If you have an interest only mortgage then now is also a good time to consider moving your mortgage to a repayment basis. You can take advantage of low rates to reduce the balance of your mortgage which not only cuts your debt but also makes it more likely that you will secure decent remortgage terms in the future."