LONDON (Reuters) – Britons who have relied on years of record-low interest rates to manage hefty mortgages are looking nervously ahead to 2015, when the Bank of England finally looks set to start raising rates.
British people have more debt per head than in any other big rich economy, at around 140 per cent of income, barely down from its peak as the financial crisis broke and equivalent to 1.5 trillion pounds ($2.3 trillion) in total.
Fast economic growth and signs wages may finally be rising mean markets now expect rates to rise in the second half of 2015, after more than six years at a record low 0.5 per cent.
But the BoE will have to tread a cautious path, as the borrowers hit hardest by higher interest rates are likely to be those who gain least from the recovery.
Stagnant earnings and fewer repossessions mean Britons have made smaller inroads into their debt than US borrowers, one reason some analysts see the BoE raising rates more slowly than the Federal Reserve.
And government forecasts see debt ratios rising above pre-crisis highs within a few years.
High debt could exaggerate the impact of increased rates on consumer spending, although the BoE expects an impact in line with previous cycles, with every one percentage point hike cutting household spending by 0.5 per cent, around five billion pounds.
Nonetheless, over half of borrowers in a BoE survey published on Monday said they would cut spending if interest rates rose to 2.5 per cent.
“Even though household debt is very high, people haven’t been feeling the impact. When interest rates do start to rise, it will finally dawn on people,” Moody’s Analytics UK economist Zach Witton said.
Lenders estimate a quarter-point rise would add just 16 pounds a month to payments on an average mortgage. But averages could be misleading when looking further ahead, economists say. Post-crisis changes to bank lending practices mean rates of interest vary widely.
Some, who took out mortgages before rates were slashed in 2009, now pay as little as 0.5 per cent but will be fully exposed to rate rises.
Later borrowers are likely to be paying higher rates – reflecting banks’ greater risk aversion – but these may be fixed.
IT worker Michael, who did not want to use his full name, and his wife bought a 350,000 pound apartment in London in May 2013 with a 10 per cent deposit. Banks offered to lend more but at an interest rate of around five per cent, they did not want to stretch themselves.
“You’ve got to be pretty stupid as a home-buyer to think (rates) are not going to go up at some point,” Michael said. But others may have lost the well-paying jobs that enabled them to borrow before the crisis, and are only getting by thanks to record-low rates.