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Interest rate rise of 2% could cause ‘significant distress’ – BoE

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  • 26/06/2013
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Interest rate rise of 2% could cause ‘significant distress’ – BoE
Mortgage borrowers could struggle with monthly repayments if interest rates rose by as little as 2%, a Bank of England report has warned.

Unless matched by an increase in income, a rise in interest rates could significantly increase borrower distress and losses to banks, the Financial Stability Report argued.

It continued: “One indication is that households accounting for 9% of mortgage debt would need to take some kind of action — such as cut essential spending, earn more income (for example, by working longer hours), or change mortgage — in order to afford their debt payments if interest rates were to rise by just one percentage point.

“This would rise to 20% of mortgage debt if interest rates were to rise by two percentage points.”

Mortgages made in the years since the credit crunch would also be affected, it suggested. Despite these mortgage borrowers taking on a lower ratio of debt to income, a 2% increase in interest rates would leave them in a similar position to highly indebted borrowers circa 2007.

And while fixed-rate mortgages represent a higher share of new mortgages than at any time since 2004, the percentage of fixed-rate mortgages in the overall mortgage stock remains at a historical low.

The report stated: “It is possible that new borrowers may not fully appreciate the risks from a normalisation of interest rates.

“For example, in the United Kingdom there are signs of new mortgage lending at multiples of household income that may fail to account prudently for an increase in interest rates.”

It also questioned whether affordability assessments required by the incoming Mortgage Market Review would be able to anticipate an unexpectedly sharp rise in interest rates.

According to a survey commissioned by the Bank in 2012, 18% of secured loans went to households with less than £200 of income remaining per month after housing costs and essential expenditure

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