Mervyn King’s concern for mortgage borrowers in their 30s and 40s may be the most important part of his final message to MPs

26th June 2013

As Mervyn King sat in front of the Treasury select committee for the last time yesterday, the Governor had one very uncomfortable message about interest rates – that many in the UK in their 30s and 40s would be in an unsustainable position if rates were to rise significantly.

It is not that King believes this to be likely any time soon. Indeed he also made it clear that the markets had jumped the gun their reaction to tapering in the US, because in his view, Ben Bernanke was not announcing the end of Q.E.

“Certainly I think the view that we are definitely at the beginning of the end, that we are definitely at the point where we need to raise interest rates, I think is a premature judgment about where we are and no central bank has moved rapidly down that course. The Federal Reserve has merely said that the easing in which it is still engaging may taper at some point depending on economic conditions. People have rather jumped the gun thinking this means an imminent return to normal levels of interest rates. It doesn’t,” he said.

But the key passage was King’s view that homeowners in their 30s and 40s might be in an “unsustainable position” if interest rates return soon to normal levels.

King said: “If there are changes around the world that lead long-term interest rates to go up – it’s unlikely, but if they do go back up quickly – then some of those households will have levels of debt that won’t look so attractive given the new lower level of house prices.”

King was identifying one area, which has mostly escaped the recession and crisis – UK house prices – though some would say that depends where one looks in the country.

It remains one of the unspoken concerns about the UK’s financial position that with a huge amount of household as well as government debt, many families remain vulnerable to rate rises.

We also know that we have a lot of borrowers who took out interest only mortgages to get on the housing ladder but who may find it difficult to refinance, and certainly to start building savings in a repayment vehicle if, one day, they are also struggling to meet the interest payments.

All this could be particularly nasty where house prices have fallen precipitously as they have in some parts of the country with Northern Ireland by far the worst region. An unaffordable mortgage and a high percentage of negative equity is a particularly grim prospect for some families. But it also begs the question for the UK more generally – are we postponing a house price contraction with QE and very low interest rates.

We do know that incoming Governor Mark Carney is likely to continue with the low interest policy and with the added possibility of another target such as GDP growth or at particular unemployment level likely to keep rates low for some time to come whatever happens to imported inflation.

That will dismay savers. Borrowers may be glad a day of reckoning has been postponed, but if we do see a recovery, for how long?

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