Trouble Ahead When Interest Rates Rise

The Bank of England has said that half a million UK homeowners could struggle to keep up with their mortgage payments if interest rates start to rise. The base rate has now been at a record low of 0.5% since March 2009, to help debt-ridden consumers cope with the recession. However, now that economic recovery seems to be on the horizon, interest rates are expected to start rising again in the near future.

Whilst the Bank of England has stated that any increase will be gradual rather than steep, at the same time it has also warned that a two percentage point rise alone could lead to 480,000 mortgage holders falling into arrears, a third more than at present. However, the Bank doesn’t expect the problem to be on the same scale as that seen in the early 1990s, when the UK saw the worst property crash since the Second World War – as long as household incomes keep pace with interest rate rises.


Of course, if incomes don’t keep up with interest rates, we can expect to see many more households affected than the number currently predicted by the Bank of England. And, as always, it will be the most vulnerable families on lower incomes, which won’t necessarily see the same rate of growth as higher income households, that will be the worst affected.


The Bank’s findings, published in its latest Quarterly Bulletin, are the result of research carried out on its behalf by NMG Consulting. Other statistics included:

  • For households with an average income of £33,000, the average outstanding mortgage debt was £83,000 and the average unsecured debt was £8,000.
  • The ratio of household debt levels to income currently lies at around 110%, compared to 130% in the 2000s and 80% in the 1990s.
  • If incomes rise by 10%, a two point percentage increase in interest rates will increase the number of households spending 40% or more of their income on mortgage payments from 4% (360,000) to 6% (480,000).


Andy Gorton, Managing Director of debt advice service, Bankruptcy Clinic, comments: ‘A 2% rise in “problem” mortgages doesn’t sound too serious – but what if, as noted above, incomes don’t rise alongside interest rates? Also, whilst it’s bad enough to be predicting 120,000 new cases of mortgage holders falling into arrears, what about the effect of base rate increases on forms of unsecured credit, such as credit cards, loans and overdrafts?


Interest rate rises: a ticking time-bomb?

Much has been written about the potentially catastrophic impact of increasing interest rates on UK household finances – and with good reason. As a nation, we rely heavily on credit to make ends meet and if borrowing suddenly becomes more expensive, a debt crisis seems inevitable. Even a small, gradual increase as promised by the Bank of England could push the most vulnerable families, already stretched to the limit, over the edge.


Make no mistake about it, these interest rate hikes are coming,’ says Andy. ‘The first increase is expected within the next few months – so if you’re already struggling with your mortgage or other debt repayments, now’s the time to seek help and nip problems in the bud.’


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Andy Gorton is the author and editor of the Bankruptcy Clinic

Andy Gorton – who has written posts on Bankruptcy Clinic Blog.

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