Interest rate rises could plunge 1.1 million UK households into 'debt peril'

As Mark Carney lays the groundwork to finally raise interest rates, a think tank has warned 1.1 million households could struggle to repay their mortgages.

by Rachel Savage
Last Updated: 18 Aug 2014

Trying to second-guess when the Bank of England will finally raise interest rates, after 64 months at the historic low of 0.5%, has become something of a national obsession, in large part because so many Brits have mortgages that will inevitably become more expensive when rates go up.

They’re damned if rates do up, as many could struggle to repay mortgages; they’re damned if they don’t, as the overheated housing market could get out of control again. Even ‘relatively benign’ rises could push many mortgage-holders over the edge, a think tank warned today.

The number of households in ‘debt peril’ – spending more than half of their post-tax income on paying back loans and mortgages – would increase from 600,000 to 1.1 million if interest rates go up to 3% by 2018, the doom-laden report from the Resolution Foundation warned.

Its raison d’être is campaigning to improve low and middle-income living standards and it argued people should be allowed to lock in low-rate mortgages. But the warning points to the rather fine line Bank of England governor Mark Carney is treading as he trades off a strengthening economy and booming housing market with highly-leveraged households and businesses and continuing ‘slack’ in the economy.

‘The Bank is well aware that a prolonged period of historically low interest rates could encourage other risks to develop. In the UK, the biggest risks are associated with the housing market,’ Carney said a speech at the Commonwealth Business Conference in Glasgow yesterday.

‘The UK economy is starting to head back to normal. As the economy normalises, [the] bank rate will need to start to rise in order to achieve the inflation target.’

Reading between the non-specific lines, Carney is slowly but surely trying to lay the groundwork for interest rate rises, while also admitting ‘household indebtedness concerns us’. Try as it might, though, the Bank of England can’t talk the housing market down – actions speak louder than words, after all.

As Carney put it, in a somewhat self-deprecating dig, ‘The clearest indication of when rates will rise is when they rise.’

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