Half a million families would struggle to pay mortgages if base rate jumped to 2.5%

Almost half a million families could be at risk of falling behind with their mortgages if the Bank of England increases its base rate to 2.5%.

Currently, 360,000 households struggle with their mortgage. In its most recent report, the bank said that if it increased the base rate to 2.5%, the number of families falling into arrears on their mortgage would increase by a third to 480,000. That is also assuming that household incomes increase by 10%.

If household incomes failed to grow by 10%, some 660,000 households would have trouble repaying their mortgages if the rate was increased to 2.5%, the bank predicts.

The base rate has been held at 0.5% since 2009, but the BoE has said it will gradually start to raise it as the economy improves. The base rate is widely expected to increase in 2015.

It’s worth noting that the bank said that a rise in rates would be “gradual”, so the step up to 2.5% would probably not be immediate. It is more likely the base rate would go up in steps to reach 2.5% over a period of time.

Many people have taken out mortgages while rates are low and not considered the effect of a interest rate rise on their monthly payments, while others have seen their incomes fall during the recession and are barely keeping up with payments.

The bank stressed most people would be able to afford a rise, but the 4% who couldn’t would have to “take action” – i.e. work longer hours or cut their spending.

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