Mortgage blog: One million homeowners face “perilous” debt when interest rates rise

Posted 10 January 2014

A new report from an influential think tank has found that over a million households face ‘perilous' financial trouble if interest rates rise as the markets expect. With a quarter of Brits also paying for Christmas through borrowing, it seems that debt problems are likely to continue for millions of people.

The new report from think tank the Resolution Foundation has found that even if interest rates rise slowly to 3% by 2018 and economic growth is strong, 1.12m homeowners will be spending more than half of their take-home pay on mortgage repayments.

If the Bank of England raised interest rates more quickly, to 5% by 2018, around 2m households would be face financial trouble - and around half of these would be families with children. Matthew Whittaker, senior economist at the Resolution Foundation, said ministers should consider ‘locking in' cheap credit for those who are heavily indebted. He added: "Even if we take a somewhat rosy view of how the economy will develop over the next few years, the number of households severely exposed to debt looks as though it will double.

"As the Bank of England has acknowledged, even small increases in the cost of borrowing could push a significant number of families over the edge and it is most likely to happen to those with the lowest incomes - who are already spending the biggest share of their budget on mortgage repayments.

"Rather than waiting for a repayment crisis to strike, policymakers and lenders should seriously consider acting now while there's still the chance to help people reduce their exposure to debt."

One quarter of people paid for Christmas by borrowing

This latest stark warning comes as a new survey from consumer organisation Which? has revealed that rather than paying off their debts, around 13m people (25%) paid for their Christmas by borrowing. Overall, more than four in ten (42%) used credit cards, loans or overdrafts to fund their spending over the festive period.

Keith Osborne, editor of says: "The latest research reveals that many households continue to struggle under the weight of their debt and that the inevitable interest rate rise will only make things worse. With a range of low-cost fixed-rate mortgage deals available it could pay to take advantage of one of these products now. Giving yourself the peace of mind that you're protected against interest rate rises could help you avoid financial pressure in the future."

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