96 per cent of borrowers could cope with an interest rate rise

According to the Bank of England’s quarterly bulletin, most borrowers would be able to cope with an interest rate rise of two per cent.

 

Taking data from the annual NMG Consulting survey of household finances, the bulletin noted that if rates were to rise to 2.5 per cent, 96 per cent of borrowers would not have affordability issues.

Seeing if a customer can cope with increased rates is a key part of the Bank’s Mortgage Market Review (MMR), where potential borrowers undertake what are known as “stress tests” to see they could manage if rates were to increase by three percentage points.

Head of lending at Mortgage Advice Bureau, Brian Murphy, commented on the news, stating that wage growth will be a key factor in how well homeowners are able to cope with the increase.

“An interest rate rise has been on the cards for some time now, and while it seems homeowners will get an extended reprieve – with a Bank Rate rise not expected until autumn 2015 – it is inevitable that interest rates will increase.

“The Bank of England estimates that only 4% of mortgagers would need to take action if interest rates rise to 2.5%, assuming incomes rise by 10%. However, almost two in five mortgagers would be prompted into action if wages remain unchanged.

“While these figures may look alarming, it’s important to remember a 2% increase in the Bank Rate will not happen overnight. The Bank of England have made repeated assurances that any interest rate increases will be gradual, so it could be a number of years before we reach a base rate of 2.5%.

Homeowners with fixed-rate mortgages – representing 94% of buyers in October* – also won’t be impacted by interest rate rises until their fixed period comes to an end. In today’s market of record low mortgage rates, the security of a fixed rate deal has never been so affordable.

“Although the Mortgage Market Review (MMR) cemented rules such as interest rate stress testing, most lenders have been carrying out this process for several years. This ensures no-one is sold a mortgage that they cannot afford should interest rates rise.

“However, consumers who took out their mortgage a long time ago – or simply haven’t reviewed their monthly outgoings in a while – should remain vigilant to any changes in their finances that could make repaying their mortgage more difficult in the future.

“For the small minority who might struggle as interest rates rise, lenders have a responsibility to work with them to ensure repaying their mortgage is made easier, so engaging your mortgage provider in an honest conversation early on is vital.”

Article: Mortgage Advice Bureau

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