December 9th, 2014
The Bank of England has this week released their Quarterly Bulletin, dramatically changing their public stance on interest rates.
According to the Bank, if interest rates rose by 2 percentage points from its current historic low of 0.5%, just 4% of mortgage borrowers would need to take action in order to maintain their mortgage payments. This announcement plays down the impact on UK households who have debts to manage, flying in the face of previous commentary on the same subject.
The announcement is the first real management of public expectations around pending rate increases, but most surprisingly, it contains large assumptions about the growth of family incomes to keep pace with escalating rates.
The Bulletin reports that the average mortgage debt per household in the UK currently stands at £83,000, and that the average household income stands at £33,000, with unsecured debt of £8,000.
Crucially however, this prediction of financial stress for as few as 4% of mortgage borrowers is based on an assumption that income will rise by 10% in the same period – in direct contradiction to findings by the Office of National Statistics last month who suggested that wages, not including bonuses, grew by just 1.3% in the third quarter of 2013.
“The Bank of England has been very clever with their figures in the latest Quarterly Bulletin” suggests Andy McBride, Business Development Director at specialist broker Contractor Mortgages Made Easy.
“To suggest that so few people would be affected if rates increased to 2.5% is merely a headline grabber. Wages are unlikely to grow at anything like 10% in the same period of time, and in many cases wages are either stagnating or even decreasing.”
“We’re dealing with contractor clients regularly who are having to deal with across-the-board contract rate cuts – where does this leave them?”
“One can only assume that the Bank of England have decided to sugar coat a suggestion of an impending rate rise with the suggestion that many will not feel the effects. That is not true.”
According to the Bulletin, the proportion of mortgagors with a ‘debt service ratio’, i.e. debt to income level, of at least 40% – classed as vulnerable – is currently around 4%. With a rate increase to 2.5%, this figure would rise to just 6%.
That would mean that the number of UK households affected would increase from 360,000 to 480,000; on the face of it a marginal rise. The reality, however, could be far worse, as McBride suggests.
“If we assume for a second that wages do not increase at the projected 10% level, that means that instead of 4% people being vulnerable to a rate increase, it could be closer to 40%.”
“That could mean big financial trouble, particularly with the Bulletin also showing that the majority of UK mortgages are currently on variable rates, most likely following a period of fixed or discounted rates.”
“The message therefore is clear; take action now to avoid trouble later. With rates set to increase next year, it would be prudent to explore options for a stable mortgage payment sooner rather than later in order to safeguard against the rate increases that the Bank of England predict.”
Article By: Mark McBurney, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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