Thousands of existing mortgage holders could be at financial risk of falling into arrears with their repayments if the Bank of England raises their base rate by just 1% in the near future, according to the chief of the “bad bank” which currently posses the loans of Northern Rock and Bradford and Bingley.
UK Asset Resolution head, Richard Banks, has argued that a small increase of just 1% on the BOE’s base rate could lead to a staggering 22,000 homeowners passing into default with their monthly mortgage repayments.
Mr Banks forecasted that the Bank will begin to raise rates later on this year, and urged policymakers to implement increases which are “small and often over a long period” rather than severely raising them sporadically in order to help mortgage holders make the transition into making higher monthly repayments.
Mr Banks said: “If interest rates rise the impact on our customers depends on how quickly they rise.”
His remarks mirror the sentiments of current BOE deputy governor, Charles Bean, who forecasted that rates could shoot up by as much as 3% in the next few years and conceded that the best possible course of action could be to “move in baby steps to avoid making mistakes”.
Mr Bean estimated that the base rate would reach around 3% by 2019, though he did not rule out the Bank’s benchmark rate being breached as early as 2017.
Interest rates have stood at their all-time low rate of 0.5% since back in March 2009, where they were lowered in order to raise consumer spending power and alleviate the financial burden that many people who feeling in the aftermath of the recession.
And despite the Bank of England Governor, Mark Carney, consistently reiterating that he has not intent to raise rates until at least next Spring, minutes from the latest Monetary Policy Committee meeting has suggested that many policymakers on the panel are beginning to sway towards raising rates earlier.
Whilst many have argued that this will stop people from taking out irresponsible levels of debt under short term low borrowing costs, the reality remains that many people will be at financial risk when rates rise; a depressing actuality considering the downward trajectory in mortgage arrear figures whilst rates have remained low.
The UKAR identified that in 2013 the number of their customers who had passed into arrears with their mortgage repayments had dropped by a staggering 39%, or 15,500, due to the lack of financial strain incurred from the extended period of low interest rates.
And whilst the organisation have pledged to repay the government the £38.3 billion of bad loans that it currently owes in full, the reality that rate rises will adversely affect a number of its associates may dampen their chances of achieving this endeavour anytime in the near future.Source; MoneyExpert