Families will struggle if interest rates rise to just 2pc, Bank of England fears - Daily Telegraph
British families would struggle if interest rates rose to 2pc or more, as soaring mortgage debts have accumulated during years of rock-bottom borrowing costs, the Bank of England has warned.
The vast majority of households can comfortably afford their loans at the current base rate of 0.5pc, the Bank's Financial Policy Committee said, with indications of financial strain substantially below those seen just before the financial crisis.
Mark Carney and his colleagues increased the base rate from 0.25pc to 0.5pc in November and are expected to move to 0.75pc in May.
But the FPC, which is chaired by Mr Carney, indicates that just a few more such moves could put significant numbers of households under strain.
"Mortgage interest rates would need to increase by around 150 basis points [1.5 percentage points] with no change in household income for [the ratio of people paying more than 40pc of their incomes on their mortgage] to return to its pre-crisis average," the FPC said in the minutes of its latest meeting.
"It [is] important not to draw too much comfort by comparison to the pre-crisis era given the scale of vulnerabilities that had built up" in recent years, it said.
Assuming banks and building societies pass on the rate hikes, this indicates the Bank only needs to raise interest rates to 2pc for this to happen - leaving rates well short of the norm before the financial crisis and adding to expectations of very slow and limited rate rises in the years to come.
Total mortgage repayments across the UK amount to 7.6pc of total income, down from 9pc before the crisis, the Bank reported.
The proportion of households paying more than 40pc of their incomes is 1.4pc, below the pre-crisis average of 1.9pc.
But at the same time debts have grown. Mortgages have shot up as a share of borrowers' income, and the share of lending at high loan-to-value ratios is climbing.
The Bank put a limit on large loans in 2014, capping mortgage lending of more than 4.5-times a borrower's income to 15pc of each bank's loans.
Officials believe this is "preventing a marked increase in the number of highly indebted households... But there has been increased lending at LTIs [loans to income] just below 4.5pc".
There is an ongoing "pick-up in owner-occupier mortgage lending" but also "softness in demand in the buy-to-let market" with extra taxes on purchases by landlords and restrictions their loans.
Consumer credit lending slows
Meanwhile surging consumer credit lending has begun to slow, growing 9.6pc in the 12 months to January, down from 10.9pc in November 2016.
This is mainly from a dip in car finance growth, the FPC said.
Other consumer credit is still soaring, however.
"Smaller lenders remained a source of growth in the consumer credit market and were expanding their portfolios at a faster rate than major UK banks," the minutes said.
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