There has been some interesting information coming from the Bank of England in recent days. The annual report using information gleaned from surveys of UK households (courtesy of NMG Consulting) has been released, and it contains some intriguing facts and figures.
Aside from the data revealed in the report, Bank of England Governor Mark Carney has reiterated that rate rises will take place slowly over a long period of time. The report, facts from which are revealed below, assumes that a rise in percentage points from the current 0.5% level to 2.5% level happened overnight. In reality this would not take place and homeowners would not be faced with a major immediate change.
Average mortgage debt per household is over £80,000
The average in this situation is £83,000, although of course the highs and lows seen in reality can be very different to this.
Would people cope with mortgage payments if rates rose to 2.5%?
Many would, but there would be some who would struggle. The report estimates the current number of households in financial distress would rise from 1.3% to 1.8%. However these figures also account for a 10% rise in income – a figure which may well not happen in reality. The report does agree that the percentage of households in financial trouble would be higher than 1.8% if there was no rise in income. However the figures affected would not be likely to hit an all-time peak.
How would this pan out in reality?
It is important to bear in mind that the likelihood of interest rates going from 0.5% to 2.5% overnight is extremely unlikely if not impossible. Mark Carney believes there would be little impact on the way people spend money if and when the interest rates do start to rise. This is likely to happen in very small steps, one at a time over the course of many months.
Will some mortgage payers find themselves in a tight spot?
Yes – this is almost certainly the case, even with gradual rate rises. The interest rates have been settled on 0.5% ever since 2009. During the interim many people have taken advantage of superbly-low mortgage rates. Many are being advised to lock into a good fixed-rate deal to offset the eventual rise of interest rates for as long as possible. Those on a variable rate are likely to feel the pinch of rising rates sooner.
As the Bank of England has pointed out, savers will be the true winners of rising interest rates. In contrast some 60% of mortgage holders would reduce their spending in the instance of a rise in interest rates. This could have an effect on the economy as a whole, which is yet another reason why more and more people are looking at the interest rates to gauge when they might rise.
It is now thought that rises may not happen before the latter part of 2015. However as is always the case we must wait and see.