Senior mortgage industry figures have told FTAdviser consumers in the UK are prepared to deal with the consequences of a rise in interest rates, despite recent research which has suggested even a rise of just 1 per cent would not be affordable for a third of households.
A survey of more than 1,000 homeowners by Censuswide on behalf of the Keep Me Posted campaign found that almost a third of mortgage holders thought an interest rate increase of 1 per cent would not be affordable.
A fifth stated they would have to make significant sacrifices to afford their mortgage, and one in 10 suggested it would tip them into financial difficulties.
Some, like Matt Phillips, managing director of Broadstone financial planners, have predicted major issues for so-called ‘zombie households’ once rates start to move, which he said would be “one of the biggest rude awakenings for individuals”.
However, Paul Broadhead, head of mortgage policy at the Building Societies Association, claimed most people are prepared for the looming rise, citing in particular a rise in the number of fixed rate mortgages that was confirmed by official figures yesterday (9 Septmber).
He said: “I think that’s [people being prepared for a rate hike] borne out by the numbers of people that are taking out fixed rate mortgages at the moment, so clearly the conversations that lenders are having about interest rate rises.
“For those people that have taken out mortgages recently there’s a stress test inherently built into that application.”
Under Mortgage Market Review rules, lenders must conduct affordability stress tests that factor in a potential future rate rise. The Bank of England’s Financial Policy Committee has recommended a test rate incorporating an increase of 3 percentage points in the first five years of a loan.
Mr Broadhead added: “Will there be people who are affected by interest rises that struggle? Undoubtedly there will, but I don’t think that will be most people.
“First of all what the Bank of England have been quite clear about is that when interest rates begin to rise it will be when the economy is on a sustainable road to recovery.
“The governor has also said this will be a gradual process and he expects interest rates to be more normalised at more like 3 or 3.5 per cent than the numbers we have seen before.
“Clearly it will mean tightening of belts for some people but I think generally people are prepared for it and people will have the ability to adjust.”
Paul Smee, director general of the Council of Mortgage Lenders, said the key factor when rates increase is how the industry manages arrears, saying he felt confident the industry and borrowers would be able to handle this effectively.
He said: “Interest rates will rise either at the end of this year or next year... then there will be the question of how borrowers are helped to cope with an increased mortgage payment for the first time in six or seven years.
“The question of whether arrears will rise or whether people will be able to manage their finances when interest rates go up is going to be an absolutely crucial one.
“We will be able to manage arrears but I think the industry has to show it can handle arrears sympathetically... I think the ability of people to adjust is there, the question is helping them to adjust.”
Mr Broadhead added that a number of lenders are preparing for a hike in interest rates by “testing their systems and processes to make sure they are robust enough”, and making sure that they have enough staff to take calls before an arrears situation comes about.
He said: “What a number of lenders are just trying to having a look and... make sure their arrears teams are geared up to speak to people who might not be in arrears now but are struggling so they can address them and give them a suite of options before that happens.”
