Interest rate rises could leave 1 in 3 homeowners in debt warns FSA


The Financial Services Authority has warned that by raising interest rates by as little as 2 percentage points 1 in 3 homeowners would struggle to keep up with their repayments.

The body warns that even a small increase in interest rates would deem 1.6 million UK mortgages “unaffordable”. The concerns come as the Bank of England considers raising interest rates from the current low of 0.5% to ease inflation, despite recent estimates showing the UK economy grew by just 0.5% in the last quarter.

Figures from the Council of Mortgage Lenders show that if mortgage rates rose by 2 percentage points above their current rate, around 2.9 million homeowners would hold home loans which breached their affordability guidelines – the FSA says that a mortgage “is affordable if its level and terms allow the consumer to meet current and future payment obligations in full, without recourse to further debt relief or rescheduling…”

Sinking house prices and tough lending criteria over the past 12 months have left tens of thousands of UK homeowners stuck with their current mortgage agreement. Figures show that even fixed rate mortgages, which are often considered the best option for those with limited finances, have soared in cost since the start of the year.

The lack of equity in properties is thought to be the biggest problems with the current UK housing market. David Hollingworth from mortgage brokers London and Country said the majority of lenders were only willing to offer their best rates to homeowners who have at least 25% equity in their property.

“There are thousands of people who are effectively stuck on their lender’s standard variable rate (SVR). While interest rates remain low this may not be too much of a problem, as fixed-rate deals are priced at a premium,” he commented.

Despite the current assurance, he warned, “Interest rates will rise, the only question is when and by how much.”