- Those spending 30-50% of income on mortgage at risk of arrears
- Blog post looks at range where financial distress might rise
As many as 700,000 U.K. households are at risk of falling in to arrears should interest rates increase, according to a Bank of England blog post.
The threat of being unable to keep up with payments jumps when between 30 percent and 50 percent of pretax income is spent on housing costs, a researcher at the central bank found. Identifying the “danger zone” is crucial to assessing how households may react to changes in their circumstances, the post published Monday said.
“Above a certain debt-servicing ratio, arrears rates rise sharply,” wrote Philip Bunn from the BOE’s Structural Economic Analysis Division. “It is the number of households who fall into this debt-servicing ratio danger zone that we should worry about when thinking about how financial distress might rise following increases in interest rates or unexpected falls in income.”
With Britain in its eighth year of record-low borrowing costs and a property shortage fueling rampant house-price gains, the risk is that borrowers become dependent on cheap money. The BOE’s Financial Policy Committee -- due to meet this week -- has signaled it’s monitoring the housing market for stability threats.
There were around 700,000 households spending more than 30 percent of pretax income on their mortgages in September 2015, and 200,000 spending more than 50 percent, the post said, citing data from the latest Bank of England/NMG Consulting Survey.
The dangerous range comes with major caveats: where it sits depends on what period of time one looks at, how arrears are measured and whether net or gross income is considered, for instance. What’s more, severe shocks could affect its position.
“The fact that there are a range of estimates for the definition of this danger zone suggests that, rather than choose a single definition, it is better to monitor how adverse scenarios might affect the distribution of debt-servicing ratios,” Bunn wrote.
The post appeared on Bank Underground, a blog that allows staff to share commentary and analysis.