BoE: Households could cope with rate rise

Many households across the UK could cope with gradual increases in the base rate of interest, claims the Bank of England.

The central bank’s governor Mark Carney has stressed that small increases in the rate will not have “unusually large effects” on household spending, with many borrowers able to cope with the change.

“Higher interest rates will increase financial pressure on households with high levels of debt,” the bank explained in its Quarterly Bulletin.

“The percentage of households with high debt-servicing ratios, who would be most at risk of financial distress, is not expected to exceed previous peaks given the likely paths of interest rates and income.

However, the Bank of England has warned a rise to 2.5 per cent from the current low of 0.5 per cent could see many families struggle to meet their mortgage obligations, especially if wages do not rise in the near future.

Recent research by the Resolution Foundation think-tank concluded that rate rises could have a significant impact on the lives of many, 2.2 million working households in Britain with below-median incomes are currently spending a third or more of their disposable income on housing – either mortgage or rent payments. This leaves an average of around £135 to pay for other essentials.

There are also concerns the low interest rate for the past few years has led to many people overstretching themselves and taking on home loans that are only just within their current means. Therefore, any rise in interest could see their payments become unaffordable.

Treasury select committee chairman Andrew Tyrie said: “Interest rates have been so low for so long now that some might conclude this is the new normal. They shouldn’t.”

However, the increase in the base rate of interest is likely to be welcomed by savers, who have not experienced a rate rise since March 2009.

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