In a scenario where mortgage costs rise by 2.5 percentage points and household incomes are unchanged, the proportion of Britons whose home-loan repayments account for more than 35 percent of income would jump to 16 percent from 8 percent, the central bank said today. If incomes increase by 10 percent, the percentage with such “high” repayments would be 12 percent.
“A significant increase in interest rates at current incomes may increase financial pressure on households with a mortgage,” the BOE said in an article in its Quarterly Bulletin. “But the extent to which higher interest rates may pose problems for households in the future will depend crucially on the extent to which incomes rise.”
The Bank of England kept its benchmark interest rate at a record-low this month and Governor Mark Carney said the recovery has further to go before stimulus is withdrawn. He’s also said that the level of household debt remains a risk and people should plan for an eventual normalization in policy.
The BOE said in the article that while mortgage debt levels were little changed over the past year, they remain relatively high by historical standards. If effective mortgage rates climbed by 2.5 percentage points, around 50 percent of mortgage borrowers -- accounting for about one quarter of total home-loan debt -- would have to take action, the BOE said. This could include cutting spending or working longer hours.
Unsecured debt holdings have increased, with the average amount outstanding rising to 6,300 pounds ($10,300) from 5,400 pounds in 2012, it said, citing the survey by NMG Consulting.
In a separate article, the BOE said low interest rates have helped small- and medium-sized businesses with revenue of less than 50-million pounds avoid bankruptcy in recent years. It said default rates “could increase in response to a rise in interest rates, especially if not accompanied by an improvement in economic conditions.”
In another part of the bulletin, the central bank examined the reasons growth and inflation “repeatedly disappointed” relative to policy makers’ projections since mid-2010.
The article cited unanticipated increases in utility costs, non-energy import costs and tuition fees for much of the difference between forecasts and outturns on inflation. The BOE also said staff underestimated the impact on future inflation of an increase in import prices before mid-2010. These assumptions were subsequently revised higher.
For growth, the projection misses can mostly be attributed to weaker-than-expected global demand, credit conditions and increased uncertainty because of the euro-area debt crisis.
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