LONDON (Reuters) - Almost a fifth of British mortgage holders say they would “really struggle” with any increase in interest rates, according to a survey released on Thursday by a public body.
Most economists expect the Bank of England to start to raise interest rates early next year as Britain’s economy continues to grow rapidly, but the BoE has said that high household debt is a major reason why it is likely to proceed cautiously.
The Money Advice Service, a public body set up in 2011 to provide free financial advice, said that 19 percent of mortgage holders said they would “really struggle to find the extra money” to cover any increase in repayments.
This proportion increased to 47 percent if mortgage payments were to rise by 150 pounds a month - roughly equivalent to an interest rate rise of 2 percentage points on a 150,000 pound mortgage with a term of 20 years.
“Mortgage holders need to be more mindful of the fact that a rise in interest rates is widely predicted – even for those on a fixed rate, as their deal will come to an end sooner or later,” said Nick Hill of the Money Advice Service.
The survey of 3,007 mortgage holders with a mix of fixed and variable rate mortgages was conducted between July 22 and July 28. Unlike in the United States and the euro zone, few British mortgages have interest rates fixed for more than two years, leaving borrowers vulnerable to rate changes.
BoE interest rates have been at a record low 0.5 percent since March 2009, but Governor Mark Carney has said that the time for them to rise is getting closer. Two of the BoE’s nine policymakers voted for a hike in each of the last two months.
Economists in a Reuters poll on Wednesday predicted that a majority would back a rate rise by the first quarter of next year, so long as wages show some sign of picking up.
The Council of Mortgage Lenders (CML), an industry body, said it backed the MAS’s suggestion that borrowers should start thinking about how to cope with higher interest rates.
But it noted that a quarter percentage-point rise in interest rates would add just 16 pounds a month to the cost of an average mortgage.
A 2 percentage-point rise in mortgage rates - which would increase borrowing costs by 150 pounds a month - would be likely to be spread over two or three years, during which wages are also forecast to rise.
“If people take some sensible, practical steps now, most will be able to cope with what the Bank of England has previously flagged as a likely ‘baby steps’ trajectory of rate rises, whenever they finally come,” the CML said.
Reporting by David Milliken; Editing by Catherine Evans