AN EXTRA 300,000 households across Britain may struggle to keep up with their mortgage payments when interest rates start rising, the Bank of England has warned.
The number of homeowners that fall into arrears increases significantly when mortgage repayments take up more than 40 per cent of gross income, which is already the case for 360,000 households.
Interest rates are currently at a record low of 0.5 per cent, but the Bank of England has warned that a rise to 2.5 per cent would see the number of families struggling to pay their mortgages go up to 480,000, assuming that wages increase by 10 per cent over the same period.
However, the figure increases to 660,000 if pay stays the same, the Bank said in its latest inflation report.
It suggested that older people would benefit from an increase in interest rates as they are more likely to be savers, while the younger generation was set to suffer most from the rate rise.
Bank governor Mark Carney has already warned that an increase is on the way but the scale is likely to be gradual.
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The Bank’s figures show that the proportion of households with a high mortgage debt servicing ratio will rise from 1.3 per cent to 1.8 per cent in the event that interest rates rise by two percentage points.
It said: “Overall, the evidence does not suggest that gradual increases in interest rates from their current historically low levels would have unusually large effects on household spending.”
The Bank also said an interest rate rise would increase the number of households with mortgage repayments of more than 40 per cent of their gross income, putting them at greater risk of falling into arrears.
Despite this, the Bank said that the number of people falling into arrears on their mortgage should be fewer than in 2007.
It should also fail to top the total of the early 1990s, when the UK suffered its worst property crash since the Second World War.
The Bank reported that average annual household pre-tax income was £33,000, with average mortgage debt of £83,000 and average unsecured debt of £8,000.
The level of household debt in the UK relative to income has fallen from its peak in 2008, but it still remains fairly high compared with previous decades.
However, the figures would seem to indicate that the majority of households would be able to cope with the interest rate rise and the effect that it would have on their mortgages and household spending.
Andrew Tyrie MP, chairman of the House of Commons Treasury select committee, said: “Interest rates have been so low for so long now that some might conclude this is the new normal. They shouldn’t.”
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