Households could struggle with debts if interest rates hit 2%: Bank of England

There could be a jump in households potentially struggling to pay back their debts if interest rates were increased to around 2%, a Bank of England document says, with low mortgage rates currently keeping borrowing costs down.

Last week, the Bank kept the base rate on hold at 0.5%, but left the door open for a potential rise in May.

Minutes of the latest Monetary Policy Committee (MPC) meeting showed that two of the nine members voted to raise rates to 0.75% amid concerns over inflation as wage growth has started to pick up.

A record of the Financial Policy Committee (FPC) meeting held on March 12 was published by the Bank on Tuesday.

First UK interest rate rise in 10 years
First UK interest rate rise in 10 years

It said the total debt service ratio - defined as interest payments plus mortgage repayments as a share of household disposable income - was below the pre-crisis average in the third quarter of 2017.

The share of households with a debt ratio above which they may be more likely to experience repayment difficulties also remains relatively small, at 1.4% in the third quarter of 2017.

The average share of households in this situation prior to the crisis was 1.9%.

The document said: "Mortgage interest rates would need to increase by around 150 basis points with no change in household income for this ratio to return to its pre-crisis average."

The report also cautioned that it is important not to draw too much comfort from comparisons to the pre-crisis era "given the scale of vulnerabilities that had built up then".

The document said although the share of lending at very high loan-to-value ratios of over 95% has remained significantly below pre-crisis levels, the share of lending at LTV ratios just below that has recovered from its crisis troughs.

But it said there was little evidence of easier credit conditions driving a stronger uptake in mortgage borrowing by households in aggregate.

A pick-up in owner-occupier mortgage lending has been offset by the softness in demand in the buy-to-let market, the document said.

The FPC meets to identify risks to financial stability and agree policy actions aimed at safeguarding the resilience of the financial system.