UK households to be hit with increase in interest rates: Study

More than 800,000 UK households would spend over half of their income on repaying debt if interest rates were to rise as expected, reveals new research into an 'adverse but plausible scenario' if the UK had weak income growth over the coming years, with skewed gains in favour of richer households.

The report prepared by the Resolution Foundation think-tank, warns the effects of a rise in line with market predictions – to around 2 per cent by 2017 – could be disastrous for many and if rates were to rise beyond expectations to 4 per cent, the number of households that could sink under a debt trap could surge well beyond a million.

The report, released today, is the first detailed analysis of how higher rates could impact different types of households.

Though Mark Carney, the Bank of England's new governor, has attempted to quash speculation that rates would rise after four years at 0.5 per cent. 

The report warns that many households were critically dependent on rates staying at their current rock-bottom level and argues that politicians would need to make the most of the low base rate to discuss how to tackle the UK's debt burden, instead of storing up problems for the future.

The study analysed the impact on families if interest rates rose by the expected 1.9 per cent in four years, but also considered the "adverse but plausible" scenario that they could increase by a further 2 per cent by 2017.

It found the UK could end up in a precarious situation as the number of families with dangerous debt levels surged sharply.

A "best-case scenario", where interest rates rose by current expectations and family household income growth remained strong, would see 700,000 households spending over 50 per cent of their income on repayments.

However, if household income growth remained weak and uneven, the figure would rise to 810,000.

The number would further increase to 1.2 million if interest rates exceeded expectations and reached 3.9 per cent by 2017.

According to Matthew Whittaker, senior economist at the Resolution Foundation, warned that the UK faced the real prospects of a large number of households already saddled with debt collapsing under the debt-burden if economic conditions tightened.