A Bank of England rate rise has just edged closer. Though positive for savers, for millions of over-stretched homeowners a rate rise will be very unwelcome. Yesterday Bank of England governor Mark Carney said the UK economy is returning to normal, indicating he could be set hike interest rates at some point this year.
Cooling offBase rate has remained at a record low for 64 months now, and while Carney wants to push rates higher, he's also well aware any meaningful hike will inflict considerable pain to largely stagnant pay packets.
In terms of impact, a £150,000 25-year mortgage at 4.5% would see a £21.83 rise in monthly payments from a 0.25% rate rise. But a 1% climb would see that rise surge to close to £90 extra a month, taking an existing £842.99 monthly mortgage payment to £931.87.
"The economy is finally producing as much as it did on the eve of the crisis in 2008, and inflation is back near its 2% target," Carney said in a speech yesterday. "In short, the UK economy is starting to head back to normal."
£1.6 trillionThe scale of the UK's overall household debt is considerable - £1.6 trillion (or 142% of household income), projected to rise to £2.2 trillion by 2018, claims the Resolution Foundation.
Resolution estimates 800,000 home owners may find their borrowing restricted because of tighter lending conditions. These potential 'mortgage prisoners' may have no option but to remain on their current lender's Standard Variable Rate (SVR).
Wage pressureThat means they're fully exposed to the passing on of increases in the Bank of England's base rate. Currently there's some consensus that rates will climb to 0.75% later this year before surging by as much as 3% by 2017.
Such a leap though would have a devastating impact on household finances, taking a £150,000 mortgage currently costing £842.99 a month (as outlined above) to £1,121.38.
Carney is mindful that wages need to increase if borrowing costs climb; wage inflation has persistently lagged consumer price inflation (inflation is running at just below 2% while annual earnings growth is closer to 0.7%).
It's estimated 93% of remortgage borrowers chose to fix their rates in June, showing an increase of 88% from May, according to Mortgage Advice Bureau's National Mortgage Index.