As the Bank says borrowers can cope with rate hikes, are fears of a repayment crisis overdone?
Rob Wood, chief UK economist at Berenberg Bank, says Yes.
Some households will be poorly prepared for a rise in rates, but this is a question of magnitude.
The Bank of England yesterday showed that, if wages grow, even a 2 percentage point rise in rates would just increase the number of vulnerable households to a normal level from its current all-time low.
That would be a tragedy for the 120,000 extra vulnerable households, but it cannot be described as a widespread crisis for a country of over 60m people.
The story would be different if wages stagnate, but why would the Bank hike rates then?
As it said, the results “do not imply that increases in interest rates from their current historically low level would have unusually large effects on household spending.” That reflects the serious cuts consumers have made to their debt burdens.
Some borrowers will need extra help in the coming years, but rates cannot stay low until the end of time to protect a small minority of people.
Brian Murphy, head of lending at the Mortgage Advice Bureau, says No.
The news that many borrowers can cope with higher interest rates doesn’t mean we should write it off as a worry completely.
The Bank’s research underlines that wage growth is a key factor in households’ financial resilience. If this doesn’t materialise, or if borrowers experience an unfortunate turn of events like unexpected unemployment, a hike could make mortgage repayments a struggle.
Many borrowers who can cope with higher mortgage costs may still have something to gain by reassessing their existing deal. This is especially true given the significant gap that has opened up between individual lenders’ standard variable rates.
People who took out a mortgage a long time ago will find the market has evolved significantly, so visiting a broker to ensure their deal is competitive could be key to keeping repayments affordable.
Those who anticipate trouble as rates rise should seek guidance as quickly as possible.