Mortgage pain starts to hit spending

Half of homeowners whose mortgage rates have risen in the past year have cut back on spending to pay the more expensive loans, according to Bank of England research published today.

The rise in the number of households struggling to pay their debts is small but likely to fuel concerns about the ability of the 1.4m homeowners on fixed rates facing a sharp jump in repayments when their deals expire.

The NMG Research survey of 2,000 people in the Bank's quarterly bulletin found

8 per cent of homeowners with loans reported problems paying for their accommodation, similar to last year, but up on 2005. Almost one-quarter of those coming off cheap fixed-rate deals reported problems and 22 per cent found it difficult to service their new loans.

According to the article by Matt Waldron and Garry Young: "This was appreciably higher than the 5 per cent of mortgagors on continuing fixed-rate deals who reported problems." Of the total number of mortgage-holders, 16 per cent said that they had been on a fixed-rate deal that had expired over the year. Most reported a rise in repayments of £59 a month, or about 12 per cent of their average monthly repayments. The rise in mortgage payments was equivalent to 0.4 per cent of total household disposable income, the research said.

Another 38 per cent of homeowners with a mortgage were on a fixed rate and 23 per cent said their deal would expire within the next year.

About 30 per cent of people with mortgages owe more than £5,000 on top of their mortgage. Six per cent of those with a mortgage reported their unsecured debts were a heavy burden.

The Bank has been monitoring household finances to see whether the number of people getting into financial difficulty is large enough to pose a threat to the economy.

The survey was conducted in September, when the Bank's main rate was 5.75. It cut its main rate to 5.5 per cent this month.

*UK house prices slumped for the second month in a row from November to December, with the annual measure hitting a 21-month low, online estate agent Rightmove said today.

House prices in mid-December were 3.2 per cent lower on the month, the sharpest monthly decline since the series began in January 2002. The largest decline was a 6.8 per cent drop in Greater London followed by a 3.8 per cent slide in south-east England.

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