News Column

Banks urged to warn households ahead of rate rise

July 20, 2014

Phillip Inman, Economics Correspondent

Millions of mortgage borrowers are at risk of financial hardship when the Bank of England begins to raise interest rates, a major study of household debt will report this week.

According to the study by the Resolution Foundation, around 2 million UK borrowers may be unprepared for the financial burden of higher interest rates.

The Bank is set to raise base rates gradually to 3% over the next couple of years, after keeping them at a historically low 0.5% since 2009. The report will warn that borrowers across the UK need to brace themselves for the end of this unprecedented "holiday period".

Matthew Whittaker, chief economist at the thinktank and co-author of the study, said: "We need to act now to ensure that all lenders seek out those customers who are just about keeping their heads above water in the current era of low interest rates. Some lenders are already doing this, but it's crucial that the whole industry wakes up to the need to identify and engage with these at-risk customers."

The report recommends that the regulator, the Financial Conduct Authority, should require lenders to undertake a financial health check of all vulnerable customers to judge how they would cope with higher repayments.

Household debt has fallen since the financial crash from around 175% of gross domestic product to 142%, leaving an overhang of pounds 1.5tn. This is expected to rise to pounds 2.2tn by 2018. Much of the debt repayment since the crash has been done by older, better-off borrowers, leaving families and many single people exposed to increased repayments as interest rates rise - either because they are among the near two-thirds of existing borrowers on variable-rate mortgages, or because they are on fixed-rate deals due to end within the next two to three years.

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Source: Observer (UK)

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