The Bank’s latest quarterly report found that assuming incomes rise 10%, just 4% of mortgage holders would need to take action if interest rates rose to 2.5% from their current 0.5% historic low.
The report stated that under these circumstances, only 1.3% of households “would need to take some kind of action” with regards to spending due to higher mortgage costs.
However, if incomes remain unchanged, 37% of borrowers would need to take action if rates rose, but this figure doesn't exceed previous peaks.
Compared to a year ago, fewer borrowers say they would be affected on both income measures.
The report also found that the average borrower would reduce their spending by 0.5% if interest rates rose by 2%.
The Bank says:
“Overall, these results do not imply that increases in interest rates from their current historically low level would have unusually large effects on household spending.”
However, the Bank notes that the outlook for household income will be a key factor in determining borrowers’ vulnerability to interest rate rises. It says there is a risk that the most vulnerable households will experience lower-than-average income growth as rates rise.
Even when Bank Rate does start to rise, it is likely to remain below its historical average for some time. Last month Mark Carney said that the bank rate rise will be gradual.
NIESR added that the Bank of England will hold interest rates at their historic low until after the general election next year, adding that they 'expect interest rates to begin to rise gradually from the middle of 2015'.
NIESR forecast that interest rates will rise from the current level of 0.5% to 1% by the end of 2015 before rising gradually to to 2.75% by the end of 2019.
Brian Murphy, Head of Lending at Mortgage Advice Bureau (MAB), comments:
“An interest rate rise has been on the cards for some time now, and while it seems homeowners will get an extended reprieve – with a Bank Rate rise not expected until autumn 2015 – it is inevitable that interest rates will increase. Wage growth will be a key factor in how well homeowners are able to cope with these increases: the Bank of England estimates that only 4% of mortgagers would need to take action if interest rates rise to 2.5%, assuming incomes rise by 10%. However, almost two in five mortgagers would be prompted into action if wages remain unchanged.
“While these figures may look alarming, it’s important to remember a 2% increase in the Bank Rate will not happen overnight. The Bank of England have made repeated assurances that any interest rate increases will be gradual, so it could be a number of years before we reach a base rate of 2.5%. Homeowners with fixed-rate mortgages – representing 94% of buyers in October – also won’t be impacted by interest rate rises until their fixed period comes to an end. In today’s market of record low mortgage rates, the security of a fixed rate deal has never been so affordable.
“Although the Mortgage Market Review cemented rules such as interest rate stress testing, most lenders have been carrying out this process for several years. This ensures no-one is sold a mortgage that they cannot afford should interest rates rise. However, consumers who took out their mortgage a long time ago – or simply haven’t reviewed their monthly outgoings in a while – should remain vigilant to any changes in their finances that could make repaying their mortgage more difficult in the future. For the small minority who might struggle as interest rates rise, lenders have a responsibility to work with them to ensure repaying their mortgage is made easier, so engaging your mortgage provider in an honest conversation early on is vital.”
