Fears grow over mortgage debt ‘time bomb’

Half a trillion pounds in floating-rate mortgage debt has created a "ticking time bomb" that could be triggered by a rise in interest rates, a leadin

Half a trillion pounds in floating-rate mortgage debt has created a “ticking time bomb” that could be triggered by a rise in interest rates, a leading accountancy firm has warned.

A rate hike of just half a per cent would add £3.4bn in the first year alone to the £39.2bn in annual interest payments that UK households currently face, according to analysis of Bank of England (BoE) data by Moore Stephens.

The firm said the bulk of that increase would be driven by the £591bn-worth of floating-rate mortgages UK borrowers have secured against their homes at an average interest rate of 4.23 per cent.

Record-low interest rates have also led to consumers piling on record levels of debt on overdrafts, car loans and unsecured personal loans, which could add an extra £440m to the overall burden in the event of a half a percent rate rise.

Michael Finch, partner at Moore Stephens, said: “Seven years of near-zero interest rates, rising house prices and ballooning consumer credit have created a ticking time bomb of debt – a rise in the base rate might trigger it.

“There is a very real risk that a lot of people who have stretched themselves to afford a home will find themselves unable to keep up repayments when their 4 per cent mortgage rate becomes 5 per cent, 6 per cent or 7 per cent.”

Fears of the debt time bomb came as Alex Brazier, executive director of financial stability at the BoE, sounded a warning over “tentative signs of boundaries being pushed in mortgage lending”.

In a speech to the University of Liverpool’s Institute for Risk and Uncertainty, he said competition for business was showing up in increased lending at higher loan-to-income multiples, with the share of lending at an LTI above four increasing to 26 per cent from 19 per cent over the past two years.

With inflation having hit 2.9 per cent in May 2017, pressure is rising on the BoE to increase interest rates and bring inflation closer to its 2 per cent target.

The BoE’s Monetary Policy Committee narrowly voted to leave interest rates at 0.25 per cent on 14 June, by five votes to three.

Adrian Kidd, IFA at London-based Radcliffe and Newlands, said he was less worried about the mortgage lending than he was about high levels of unsecured consumer debt.

“I think [mortgage] lenders have been slightly too prudential,” he said. “Default rates are relatively low. Lenders will still be competitive with the rates they offer consumers, and the amount of variable rate mortgages is not high in percentage terms.

“Most of the country is on fixed rate mortgages, and a lot of people who own a property are mortgage free.

“If you are buying now, though, you have to be careful. Don’t overstretch yourself now, because you are stretching yourself at the top of the market.”

But he described the unsecured consumer borrowing as having the potential to create a ‘perfect storm’, adding: “I can see a recession coming in six to nine months’ time. I don’t think it could take a lot to push people over the edge.”

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