Households may struggle if interest rates hit 2% - Bank

There are few signs of a rise in mortgage borrowing but caution is required
There are few signs of a rise in mortgage borrowing but caution is required

There could be a jump in households potentially struggling to pay back their debts if interest rates were increased to around 2%, a Bank of England document says, with low mortgage rates currently keeping borrowing costs down.

Last week, the Bank kept the base rate on hold at 0.5%, but left the door open for a potential rise in May.

Minutes of the latest Monetary Policy Committee (MPC) meeting showed that two of the nine members voted to raise rates to 0.75% amid concerns over inflation as wage growth has started to pick up.

A record of the Financial Policy Committee (FPC) meeting which took place on March 12 was published by the Bank on Tuesday.

It said the total debt service ratio - defined as interest payments plus mortgage repayments as a share of household disposable income - was below the pre-crisis average in the third quarter of 2017.

The share of households with a debt ratio above which they may be more likely to experience repayment difficulties also remains relatively small, at 1.4% in the third quarter of 2017.

The average share of households in this situation prior to the crisis was 1.9%.

The document said: “Mortgage interest rates would need to increase by around 150 basis points with no change in household income for this ratio to return to its pre-crisis average.”

The report also cautioned that it was important not to draw too much comfort from comparisons to the pre-crisis era “given the scale of vulnerabilities that had built up then”.

The document said although the share of lending at very high loan-to-value ratios of over 95% has remained significantly below pre-crisis levels, the share of lending at LTV ratios just below that has recovered from its crisis troughs.

But it said there was little evidence of easier credit conditions driving a stronger uptake in mortgage borrowing by households in aggregate.

A pick-up in owner-occupier mortgage lending has been offset by the softness in demand in the buy-to-let market, the document said.

The FPC meets to identify risks to financial stability and agree policy actions aimed at safeguarding the resilience of the financial system.