The Bank of England is warning mortgage borrowers face a major income shock when interest rates rise and it remains a key risk to the stability of the UK economy.
The Bank’s financial policy committee financial stability report, published today, says banks could face losses unless mortgage borrowers make major lifestyle changes.
The Bank estimates a 1 per cent rise in interest rates would require 9 per cent of mortgage borrowers to adjust their behaviour by cutting spending, earning more money or changing mortgage.
If interest rates rise 2 per cent, one in five mortgage borrowers would need to take action so they can afford their mortgage payments.
The report states: “A rise in interest rates, without a strengthening in income, could significantly increase borrower distress and losses to banks.
“New mortgages to UK households made recently may also be vulnerable to a normalisation of interest rates.
“For example, while new mortgage borrowers in 2012 typically had lower income gearing than new mortgages borrowers in 2007, their income gearing would be broadly similar if mortgage rates were as little as 2 percentage points higher, assuming all other factors remained equal.”
The report says the impact could be mitigated by fixed rate mortgages but says while the share of new fixed rate deals is higher now than at any time since 2004, the share of mortgages with fixed rates in the overall stock is close to an historical low.
The FPC says mortgages are still performing significantly better than in the 1990s and improved in 2012, but this is down to low interest rates and bank forbearance.