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Creditfix LB 03-2017

Households in Trouble if Interest Rates Reach 2 Per Cent

Many UK households could get into financial difficulties with mortgage payments if the base interest rate was to rise to 2 per cent.

Despite UK household’s debt as a share of income falling by almost 20 per cent since the peak before the global financial crisis, many people have become used to interest rates being at an all-time low.

Therefore, a rise of about 1.5 per cent in the base rate would put a proportion of households with large debts in a difficult position with their mortgages, policymakers from the Bank of England have indicated.

The Bank of England kept the base interest rate at 0.5 per cent this month but has suggested that it will rise gradually over the next couple of years, with many experts predicting the first rise to come in May.

Within minutes released last week from that policymakers base rate meeting, it was shown that the proportion of households paying more than 40 per cent of their income in mortgage repayments stood at 1.4 per cent in the third quarter of last year, lower than the 1.9 per cent level before the crisis.

However, the minutes also claimed: ‘Mortgage interest rates would need to increase by around 150 basis points (1.5 per cent) with no change in household income for this ratio to return to its pre-crisis average’

It was also shown in the document that average mortgage repayments as a percentage of total income had dropped from the high of 9 per cent to stand at 7.6 per cent.

It was also noted that despite recent slowing, consumer credit that included credit cards, personal loans and overdraft borrowing remained high.

Though the annual growth in consumer credit was down to 9.3 per cent in January from the peak of 10.9 per cent in November, it was thought that much of the slowdown was due to a reduction in the growth rate of car finance.

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