The Bank of England has inferred that steadily lifting the base rate from its 70-month low of 0.5% will not synthesize record numbers of financially stricken households, however this prevention of greater numbers of impoverished households is dependent on incomes rising for the UKís most vulnerable breadwinners.
In its annual article on household finances, drawing on data provided by NMG consulting, the central bank reasoned that 4% of mortgages would need to cut costs or work longer hours to cope with a 2% rise in interest rates and 120,000 more households would feel the strain of higher interest rates on their repayments. This figure would increase to 300,000 if wages do not grow as predicted in the coming years.
Whilst naturally breadwinnerís salaries remains a decisive factor in assessing how susceptible households will be to a base rate hike, the BoE acknowledged that the most susceptible households ñ due to their relatively poor incomes – could also be the most likely to endure weak wage growth when interest rates rise.
This theory was given weight by the NMGís survey which showed that households with debt equal to or exceeding 40% of their total income have a far gloomier outlook on their prospects for a pay rise in the next 12 months. However, this group is not expected to grow in number to peak levels.
ìHigher interest rates will increase financial pressure on households with high levels of debt,î the Bank said.
ìThe 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.
The Bank of England highlighted the bulk of the burden, resulting from a base rate hike, would fall on the shoulders of younger people due to the likelihood of this group to borrow, whilst elderly folkís propensity for savings suggests that they will be amongst the biggest winners from any interest rate raise.
This inference has fuelled fears that the country could become characterised by a disparity between generations, with younger people further disenfranchised with a professional life associated with stagnant wages and spiralling levels of debt, whilst elderly savers – despite taking in small amounts of income ñ can enjoy returns on their saving endeavours.
The annual report bares marked similarities to last yearís edition, with the only tangible difference being householdís heightened ability to cope with their debt in an interest rate hike in 2014. However, it is the tone in which the latest report has been written which has notably changed, with the central bank less concerned about the potential for growing numbers of vulnerable households, rather ostensibly choosing to view the research in a different light, focussing on the groups it benefits i.e. pensioners as opposed to putting emphasis on the groups most at risk.
This noticeable change of disposition could be down to the Bank seeking to mollify the wider public in the build-up to its hotly anticipated base rate lift expected to come into play in the middle part of next year.
The bank also stressed that households will be in a far stronger position to cope with debt stemming from mortgage payments now than back in 2007, and this is reflected in the NMGís findings, whilst any interest rate rise is likely to be carried out slowly but surely.
The Bank concluded its report, stating: ìAs usual, raising interest rates will have significant distributional consequences. It will make borrowers worse off and savers better off, holding other factors constant. On average, younger households, who are more likely to be borrowers, will be worse off, while older households, who are more likely to be savers, will gain. Higher-income households will typically be more adversely affected than low-income households, but differences in the impact between regions are likely to be small.î
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