Interest Rates Rise: Will You Feel The Impact?

The Bank of England has signalled that thousands of households will have to cut back as they struggle to keep up with mortgage payments when interest rates start rising.

The bank estimates that 37% of households will either need to work more or spend less if interest rates rise by 2%, with those in their 20s, 30s and 40s hardest hit.

However, if incomes rise by 10% then only 4% of households will need to take action. But in recent years salaries have failed to increase as much as the cost of living.

Here are three scenarios showing the impact of rising rates on different households and their mortgages.

:: Mr Taylor lives alone on an income of £26,000, with £83,000 outstanding on his mortgage. He is paying a mortgage rate of 2.5%, which equates to monthly payments of £369 - 17% of his income.

Looking forward to 2019 and an interest rate of 4%, his monthly payments will be £434.

As long as his salary goes up too - to more than £30,000 - he will still be paying 17% of his income

:: The Smith family live together on a slightly higher combined household income of £43,000. Their outstanding mortgage is £150,000. At a rate of just under 2.5% it costs them £667 per month - almost 19% of their income.

By 2019, with a rate of almost 4%, they will face monthly payments of £785.

As long as they are earning more than £50,000 by then it will still be 19% of their income.

:: The Jones family's household income is £100,000 per year. Their mortgage is £400,000, which currently costs them just under £1,800 a month - 21% of their income.

Five years from now they will face monthly payments of nearly £2,100.

As long as their salaries go up to nearly £118,000, the proportion of their income they pay will remain around the same at 21%.

Higher earning families like these face the biggest rises.

The Bank of England's projections show a rise in rates from the current record low of 0.5% to 2.5% would raise the number of households struggling to pay their mortgages from 360,000 to 660,000 if wages stay the same.

The bank considers households where more than 40% of income is spent on mortgage repayments as vulnerable since they are at more risk of falling into arrears.

However, if rate rises are accompanied by a 10% rise in incomes the number of vulnerable households will only rise to 480,000.

While the interest rate has been at 0.5% for over five years, looking back over 20 years much higher rates were not unusual. The mean interest rate since 1994 is 3.9%.

Bank governor Mark Carney has warned that an increase is on the way but the scale is likely to be gradual.