BOE research backs up homeowner rate rise concerns

New Bank of England research supports homeowners’ rate rise concerns, with the data revealing that around 6 per cent would have a debt-serving ratio of at least 40 per cent if mortgage interest rates rise by 2 per cent.

According to the Bank of England research, currently 4 per cent of mortgagors have a debt-servicing ratio of at least 40 per cent.

Assuming a 10 per cent increase in income for all households, a 2 per cent rise in mortgage interest rates would be likely to raise the proportion of mortgagors with a debt-servicing ratio of at least 40 per cent to around 480,000 households, up from 360,000.

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But the impact would be more severe in a second, less likely, scenario where there was assumed to be no increase in incomes.

The data comes from an NMG Consulting online survey of around 6,000 UK households during September, looking at what impact rising interest rates would have.

An estimated 37 per cent of mortgagors would need to take action if interest rates rose by 2 per cent while income remained unchanged, equivalent to 12 per cent of all households.

A recent YouGov survey for the Council for Mortgage Lenders found more than a quarter of homeowners believe they will face financial difficulty when mortgage rates rise, with the number of people struggling likely to be greater than the number reporting ‘healthy’ finances within three years.

However, 27 per cent expect to be either be in ‘serious or slight’ difficulties in three years’ time, up significantly from 18 per cent currently.

Around 43 per cent of homeowners said they remain concerned about the impact an interest rate rise would have on their monthly repayments, according to another survey by Ipsos Mori on behalf of Halifax.

However, 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.

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, noted the research.

The document, written by Gareth Anderson of the BOE’s monetary assessment and strategy division, Philip Bunn and Alice Pugh from the structural economic analysis division, and Arzu Uluc in the macro financial risk division, noted that at the time of the November inflation report, markets were suggesting that bank rate was not expected to start increasing until late 2015.

“As the economy normalises, bank rate will eventually need to start to rise in order to achieve the inflation target.

“But, as noted in the November inflation report, when rate does begin to rise, the pace of rate increases is likely to be gradual, with the rate probably remaining below its historical average level for some time,” it stated.