Base rate impact depends on wage growth

The Bank of England’s latest Quarterly Bulletin estimates that just 4% of borrowers will need to “take action” in response to a rate rise, providing that wages rise.

But the central bank has warned that that figure could rise as high as 37% unless wages start to grow.

And Murphy cautioned that borrowers need to be aware of the potential risk of a rise.

He said: “Wage growth will be a key factor in how well homeowners are able to cope with these increases: the Bank of England estimates that only 4% of mortgagers would need to take action if interest rates rise to 2.5%, assuming incomes rise by 10%.

“However, almost two in five mortgagers would be prompted into action if wages remain unchanged.”

Recent figures from the International Labour Organisation found that the UK is currently undergoing its sixth consecutive year of falling real wages.

In real terms both medium and high skilled workers have seen their wages fall by in between 7% and 14% since 2008’s peak.

But Murphy said that whilst the figures may look alarming, it’s important to remember a 2% increase in the Bank Rate will not happen overnight.

He added: “The Bank of England have made repeated assurances that any interest rate increases will be gradual, so it could be a number of years before we reach a base rate of 2.5%. Homeowners with fixed-rate mortgages – representing 94% of buyers in October – also won’t be impacted by interest rate rises until their fixed period comes to an end.

“In today’s market of record low mortgage rates, the security of a fixed rate deal has never been so affordable.