Rate rise could imprison 800,000
The report stated that 2.3 million UK mortgagers, totalling two in five, are under threat.
Interest rates, which have stood at 0.5% for five years, are expected to start shifting later this year at the earliest.
Jeremy Duncombe, director of Legal and General Mortgage Club, said: “It is alarming that so many people could struggle to meet their mortgage repayments if rates rise, which will inevitably happen.
“In our recent ‘Let’s House Britain’ report, we listed ‘being prepared for an interest rate rise’ as one of the ten essential steps to fixing the housing market.
“Rates are arguably 2% lower than ‘normal’ right now, and we need to prepare borrowers for any pending market correction to ensure that they don’t fall into arrears.”
By 2018 one in four mortgagers could be ‘highly geared’ according to the Research Foundation, meaning they would have to spend more than a third of their after-tax income on repayments. Mortgage holders in this position could increase to 2.3 million from 1.1 million.
The number of households in ‘debt peril’, meaning they would spend more than half of their income on repayments, could increase from 0.6 million to 1.1 million.
Low to middle income households would feel the biggest pinch from a rate rise, as three in four mortgagors at the bottom 10% of income distribution are already ‘highly geared.’
Duncombe added: “Our latest Mortgage Mood survey revealed that 68% of homeowners believe rates will rise within a year, but the majority don’t believe that they will increase by more than 1%.
“Our research also showed that the historically low rates we’ve seen over the last five years have distorted consumer perceptions, with a quarter of homeowners believing that a ‘normal’ mortgage rate should be between 1.1% and 3%.
“A further 26% admitted that they have no idea what ‘normal’ should look like. It is important for the industry to work together to alert consumers of the implications of a rate rise and help them to plan their finances accordingly.”