The Bank of England has warned half a million families would be at risk of falling into mortgage arrears once it started to raise interest rates from their emergency level of 0.5%.
Threadneedle Street said the number of households running into difficulties would increase by a third to 480,000 in the event of a two-percentage-point increase in the cost of borrowing.
The Bank stressed the proportion of borrowers having trouble paying their home loans should remain well below the levels of the early 1990s – when Britain suffered its worst postwar property crash – provided 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 were based on a survey for the Bank conducted by NMG consulting. It found that the average outstanding mortgage debt was £83,000 per household, with average household income of £33,000 a year (£43,000 for those with a mortgage) and unsecured debt £8,000.
Interest rates have been pegged at 0.5% – the lowest in the Bank’s 320-year history – since March 2009 and cheap borrowing costs have made it easier for households with large home loans to keep up payments on their mortgages.
via The Guardian