What happens to homeowners when interest rates rise?

Housing estateNew Bank of England governor Mark Carney has made some friends in the first couple of weeks in the job; the markets love him, analysts seem impressed and borrowers will be over the moon by his pledge to leave interest rates at historic lows.
But there will come a time when his popularity will inevitably wane as interest rates have to rise and with that rise could come some serious pain for UK homeowners. There may be more than just pain if a new report from think-tank Resolution Foundation is right, over a million households could be headed for 'debt peril'.

Last year it identified 3.6 million households that were 'debt-loaded' meaning they pay out a quarter of their income on debt repayment. Those in debt peril spend more than half their income servicing debt.

If interest rates rise to 3.9% by 2017 (which the think-tank thinks is plausible) and income growth stays as it is, ie below GDP growth, then 1.25 million households could find themselves in a perilous state of affairs.

The government is loading us up with cheap money by giving lenders access to an £80 billion pot of cheap finance and pushing first-time buyers into the market through its Help to Buy scheme but it is also pushing up house prices meaning more people are taking on more debt.

That's all well and good now when fixed rate mortgage deals are cheap and those on a tracker mortgage are smugly paying low repayments but what about when rates go up? The Bank of England's David Miles doesn't believe mortgage rates will shoot up because they did not shoot down when interest rates fell to 0.5%. However, what he is forgetting is the greed of the banks – of course they're not going to pass huge savings on to consumers but if rates rise you can bet your mortgage repayment that the cost of your home loan will keep rising.

It's a precarious state of affairs and no wonder Carney has said he's not going to let interest rates rise in the foreseeable future, he has the fate of the nation's homes on his shoulders and the sword of 'debt peril' for a million households hanging over his head.

With rising house prices, people throwing stupid money at property and cheap credit anyone would think it's the property boom years of 2006/07 again and we all know where that got us.
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