4m 'would struggle' with 2% mortgage increase

One in four homeowners would find it hard to meet their monthly mortgage repayments if interest rates rose by a further 2%, research showed today.

Around 26% of mortgage holders, the equivalent of 4.3 million people, said they would have problems coping if their current mortgage rate increased by 2%.

The number rises to 36% among 25 to 34-year-olds, who are likely to have only recently bought their first home and may have overstretched themselves to get on to the property ladder, according to market analyst Mintel.

More worryingly 4% of homeowners said a 2% rise in interest rates could prove "catastrophic" to their financial situation, suggesting around 640,000 mortgage holders are already stretched to the limit.

At the same time a third of people said such a rise would make a difference to their finances, but they would be able to cope.

Paul Davies, senior finance analyst at Mintel, said: "With five interest rate rises since November 2003 and at least one more anticipated by the end of the year, it is not surprising that certain borrowers will struggle with their repayments given further rises in interest rates.

"This could lead to a rise in mortgage arrears and possessions, both of which would clearly have a detrimental effect upon the state of confidence within the housing market, as well as lenders' overall profitability levels."



Around 13% of people with a mortgage admitted they had no idea what impact a 2% rise in mortgage rates would have on their monthly repayments, while 30% thought they would have to pay at least ?100 a month more.



A further 16% thought they would have to find ?150 extra if rates rose by 2%, rising to 24% among 25 to 34-year-olds.

Mintel warned that people's finances were clearly vulnerable to a deterioration in economic conditions.

It said that while a soft landing was clearly the most likely outcome for the housing market, a more severe crash remained a "definite possibility".

It added that the 1990s housing slump was largely a reaction to the sharp increase in the level of mortgage debt, which left many homeowners struggling to cope when the economy weakened and interest rates began rising sharply.

But despite the uncertainty surrounding the housing market, the research found that 20% of people plan to buy a new home over the coming two years, around a third of whom are planning to buy their first property.

· Mintel questioned 1,889 people during June.