A little over one million households could be in for a shock if interest rates rise in the near future. That’s the verdict of experts from the Office of National Statistics (ONS). The ONS has released the information as part of its Economic Review for October 2015.
It refers to households that are “highly leveraged” – that is, households that owe a large amount of mortgage debt. Their definition of this is a household that owes at least 4.5 times their disposable income on their mortgage.
One in eight households
According to the figures, 1.1 million households are in this position. This equates to one in eight households in total. However this refers to the position in 2013, and it is slightly lower than the figure for two years’ previous to that. The ONS has revealed 13.2% of households had high mortgage debt in 2013. This compares to 14.5% two years’ previously.
25% of households in jeopardy are in London
Perhaps not surprising is the fact that Londoners account for a quarter of those in potential financial peril. A very similar number (27%) reside in the eastern or south-eastern parts of England. These are typically the areas where properties cost the most, so people would have been more likely to take out bigger mortgages in order to afford to buy them. These figures no doubt represent people who were able to get mortgages before the Mortgage Market Review (MMR) rules kicked in.
What happens if interest rates start to rise?
The goalposts are constantly being moved with regard to the likelihood of a rise in interest rates. At the present time the estimated time of a change to the base rate is 2017. This follows previous suggestions that increases could be seen as early as the end of 2015, and then into 2016.
Yet while it would appear householders have a grace period of another year or so before they will see rising mortgage payments, now is definitely the time to consider how they will be impacted when rates do go up. Indeed, a quote from Matthew Whittaker, a chief economist at the Resolution Foundation, suggests that banks should “engage with their customers” so they will realise how a rise in rates could affect them. This suggests some mortgage holders might be neglecting to plan ahead for potential rises, instead preferring to worry about it tomorrow.
The 4.5 multiple is the level at which a household is said to be heavily leveraged. It leaves very little room for movement if things are to change and rates were to rise. Yet people have very likely become complacent after the long period at which the base rate has been at an all-time low. It could come as a huge shock when those rates do eventually start rising – as they surely will at one point or another.
While the majority of households are below that all-important 4.5 multiple, those that are on or above it should do some serious number-crunching to avoid financial disaster at a future stage.