Bank Of England States That 2% Interest Rate Rise Would Put 480,000 Property Owners Into Mortgage Arrears
UK property buyers have an average mortgage debt of around £83,000 (GBP) plus many will have unsecured loans of up to £8,000 (GBP), however many are typically earning less than £43,000 (GBP) a year
The Bank of England has warned that up to half a million property owners could be at risk of falling into mortgage arrears once interest rates rise from their historic 0.5% low.
The BoE said the number of UK property owners expected to run into difficulties would increase by a third to approximately 480,000 in the event of a two-percentage-point increase in the cost of borrowing.
The BoE stressed the proportion of borrowers having trouble paying their mortgage loans should remain well below the record mortgage arrears levels of the early 1990’s, when the UK suffered its worst post-war property crash, provided that earnings incomes rose alongside interest rates.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.
The Bank of England said in its Quarterly Bulletin: “Higher interest rates will increase financial pressure on households with high levels of debt. 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.”
Interest rates have remained at 0.5% since March 2009, the lowest in the Bank’s 320-year history, and cheap borrowing costs have made it easier for households with large home loans to keep up payments on their mortgages.
The Bank of England has used its forward guidance policy to stress that interest rate rises, will be gradual and limited in size when they are implemented.
Economists do not anticipate the first interest rate rise to happen before the second half of 2015 but the Bank is already exploring the impact of tighter policy on households where more than 40% of income is spent on mortgage repayments, since these property buyers are the most likely group to fall into mortgage arrears.
The Bank of England Quarterly Bulletin stated: “Assuming a 10% increase in income for all households, a two-percentage-point rise in mortgage interest rates would likely raise the proportion of mortgagors with a debt service ratio (DSR) of at least 40% from its current level of 4% to about 6%. The number of UK households in this vulnerable category would increase from about 360,000 to 480,000.But the impact would be more severe in a second, less likely, scenario where there was assumed to be no increases in incomes. These experiments illustrate that, unsurprisingly, the outlook for household income is a key factor that will determine the vulnerability of households to a rise in interest rates. There is a risk that the most vulnerable households will experience lower-than-average income growth as rates rise. As usual, raising interest rates will have significant distributional consequences. It will make borrowers worse off and savers better off, holding other factors constant. On average, younger households, who are more likely to be borrowers, will be worse off, while older households, who are more likely to be savers, will gain.”
Wages have been under pressure in recent years, but the Bank is assuming that the economic recovery of the past two years will create the conditions for rising incomes and higher interest rates. Official data shows that the ratio of household debt to income has fallen back from its peak in early 2009.
The debt-to-income ratio held steady at about 80% during the 1990’s, then increased steadily in the 2000’s to peak at just over 130% and has since dropped to just over 110%.
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