Extra 300,000 households may struggle with mortgage payments as interest rates rise

An extra 300,000 households may struggle to keep up with their mortgage payments when interest rates start rising, the Bank of England has signalled.

The number of homeowners that fall into arrears increases significantly when mortgage repayments go over 40% of gross income, which is already the case for 360,000 households.

Interest rates are currently at a record low of 0.5% but the Bank warns that a hike to 2.5% would see the number of families struggling to pay their mortgages rise to 480,000 in the event that wages increase by 10% over the same period. However, the figure increases to 660,000 if pay stays the same.

Older people will benefit from an increase as they are more likely to be savers, while the younger generation is set to suffer most from the rate rise.

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

The Bank figures show that the the proportion of households with a high mortgage debt servicing ratio will rise from 1.3% to 1.8% in the event that interest rates rise by 2%, well below previous peaks.

It said: "Overall, the evidence does not suggest that gradual increases in interest rates from their current historically low levels would have unusually large effects on household spending."

The Bank reports that average annual household pre-tax income is £33,000, with average mortgage debt of £83,000 and average unsecured debt of £8,000.

The level of household debt relative to income has fallen from its peak in 2008, but it remains fairly high compared with past decades.

Andrew Tyrie, who is chairman of the Treasury Select Committee said: "Interest rates have been so low for so long now that some might conclude this is the new normal. They shouldn't."