Interest rates warning for homeowners

People who own their own property have been warned they could be hard hit by an increase in the cost of borrowing.

Interest rates have remained at …

People who own their own property have been warned they could be hard hit by an increase in the cost of borrowing.

Interest rates have remained at a record low of 0.5 per cent since March 2009, although improving economic conditions have led to speculation that a rate hike could be just around the corner.

As a result, the Office for National Statistics (ONS) is concerned that people with high levels of mortgage debt could find themselves in financial difficulties.

"If households have used the period of low interest rates to reduce their levels of debt relative to income – their leverage – and their interest payments relative to income – their gearing – then the direct effect of a rise interest rates will be relatively muted," the organisation said.

However, it stated that households who have "normalised" low interest rates and retained floating rate mortgage products may have "adopted a more highly leveraged position than is optimal in the long run".

The ONS said this means they could end up experiencing considerable "mortgage distress" if the cost of borrowing goes up again.

The Resolution Foundation think tank has therefore called on financial services providers to try to pre-empt any problems.

Matthew Whittaker, chief economist at the body, said that since interest rate hikes are back on the agenda, it is "vital that banks engage with their customers to explain how their mortgage repayments could rise".

He added that he is concerned that so many households are currently living with particularly high levels of mortgage debt.

According to ONS data, 1.1 million households had mortgage debts comparable to more than 4.5 times their disposable income in 2013.

While this is slightly down on the figure recorded two years earlier, it still accounts for almost one in seven households who have a home loan in place.

By Joe White

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