Majority of mortgage holders could cope with rate rise
09/12/2014
A report by the Bank of England has claimed that the majority of mortgage holders would be able to cope with increased interest rates, on the basis that household incomes increase by 10% at the same time.
The report claimed that in the event of interest rates increasing to 2.5%, only 4% of mortgage holders would need to take action in order to keep up with their mortgage repayments.
Interest rates have been kept at a historic low of 0.5% recently, but the Bank of England has maintained that interest rates will have to rise eventually.
However, whilst it is generally accepted that interest rates will increase, many homeowners are concerned that they may not be able to afford to continue paying their mortgage if rates were to rise too early.
These fears were backed up by the same report, which said that if incomes did not increase by 10% by the time interest rates reached 2.5%, then around 37% more mortgage holders would need to take significant action in order to meet their monthly mortgage repayments.
Importance of wage growth
The overall importance of wage growth throughout the UK economy has been highlighted by the report. The report said that around 660,000 households would have trouble coping with an interest rate of 2.5%, if wages were to stay the same.
In contrast, this drops to 480,000 in the event that wages increase by 10% at the same time as an interest rate rise.
Those who would be at the greatest risk of falling into arrears are households that allocate more than 40% of their income to mortgage repayments.
However, whilst a minority of people would face problems with their mortgages if rates were to increase dramatically, the Bank of England have maintained that any rises would be gradual. Therefore, it is anticipated that any negative effects would be minimised, as the further rises could be delayed in line with the time it takes for wage growth to catch up.
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