The Bank classes this group as those who have to spend at least 35% of pre-tax income on mortgage repayments. According to its Quarterly Bulletin Q4 2013, a 2.5% lift in the base rate would mean more than half of the eight million families with mortgages would not have enough cash to cover the increased repayments. As such, some could be forced to take second jobs, work longer hours or make budget household cuts, unless wages increase.
In October, HML published research which found that a 1.25% base rate rise over a year would tip 30,000 extra accounts into arrears of three months or more. The typical increase in arrears would stand at £700.
HML forecast that the unemployment rate would drop to seven per cent by the start of 2015, meaning a base rate rise could shortly follow. This situation looks even more likely now, given the announcement this week that the unemployment rate has declined to 7.4 per cent.
Damian Riley, director of business intelligence at HML, said:
“We support the Bank’s projections. Our research estimating the rise in arrears following a base rate increase published in October was based on mortgagors continuing to spend their income in the same proportions as they do today, plus a static economy.
“If borrowers take sensible steps – such as tailoring expenditure in line with their priority financial commitments - there is no reason why a large proportion should fall into the debt trap. Of course, there will always be people at the margins with incomes that simply cannot stretch to accommodate higher mortgage payments. For those, there may be some respite on the horizon following Bank of England governor Mark Carney’s statement that “inflation has fallen back to within a hair’s breadth of the two per cent target and the recovery has finally taken hold”. This may translate into inflation-busting wage settlements for 2014, the first time in five years, with the additional income being available to contribute to any increase in mortgage payments.
“As always the advice remains the same; borrowers who are struggling to meet mortgage payments should talk to their lender as soon as possible. Where mortgage arrears are concerned, early engagement tends to lead to the best outcome for borrower and lender alike.”
