Bank of England issues interest rate warning

Coins and cash

The Bank of England has, in its FPC (Financial Policy Committee) Financial Stability Report – which was published this week – warned that mortgage borrowers might have to make lifestyle changes in order to cope with the possible rise in interest rates.

The report came after Sir Mervyn King, who stepped down as Governor of the Bank of England a day before its release, warned the Treasury Committee that it would “not be sensible” to increase interest rates to “normal levels” until there was a real prospect of sustainable economic recovery.

The FPC report estimated that a 1% increase in interest rates would mean that one in ten mortgage borrowers would have to change their lifestyles to cope, by either earning more, spending less or remortgaging. A 2% rise in interest rates would push the number of affected borrowers to one in five.

A rise of 1% would push up the repayments for a mortgage worth £100,000 – which, according to research released by Moneywise earlier this month, is roughly the balance of the average outstanding mortgage loan in the UK – by more than £60 per month.

Experts have predicted that it may be as late as 2015 before the Bank of England pushes up the base rate beyond its historically low level of 0.5%; however, mortgage lenders may have to increase their own rates before then due to rising costs.

See the full FPC report.

The report comes just days after lending data from the British Bankers’ Association revealed that, whilst gross mortgage lending is at high levels, net mortgage lending is actually negative. This is because borrowers – perhaps nervous of the potential end to this period of historically low rates – are repaying their mortgages faster than lenders can issue now ones.

May was the fifth consecutive month to see negative net lending, meaning that this ‘mortgage contraction’ is the longest seen since 1997 – 15 years ago – when the collection of comparable data began.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.