Mark Carney: 'think about an interest rate being 3 percentage points higher than today'
Labour MP Wes Streeting raised the issue of how the economy would cope with a rise in interest rates at the Treasury Select Committee with the Bank of England's Financial Policy Committee (FPC) on Tuesday.
Streeting highlighted that interest rates have been at a record low of 0.5% since 2009 and many new homeowners may never have seen a rate rise in their lifetime.
The fear is that people who signed on for a 0.5%-linked mortgage thinking they could afford it would struggle with payments if rates begin to climb higher.
The lower the interest rate, the cheaper it is to borrow to money. However, since interest rates charged on mortgages fluctuate with interest rates, this means that when rates rise, the monthly cost of repaying your mortgage go up to.
Addressing this issue, Carney called for would-be home buyers to plan for as much as a 3 percentage point rise in their monthly mortgage repayment rate.
If you had a 25-year mortgage worth £250,000 on a 1.5% rate, your monthly repayments would jump from £1,000 to £1,389 if the rate rose to 4.5% - a not insignificant rise in outgoings for any household.
He admitted that interest rates are unlikely to rise by that much, especially in the wake of the Brexit vote, but said this should provide buyers with an adequate cushion to help them cope with and other economic shocks, such as rising food prices or unemployment rates.
Here is what Carney said:
"In terms of guidance and perspective to households, re-enforcing in communication terms: think about a stressed interest environment, think about an interest rate being 3 percentage points higher than today, think about your ability to service debt if that were to happen. I recognise that in this current low-interest rate environment that seems relatively unlikely. Just have enough headroom for an individual taking out a mortgage."
The FPC also stressed that interest rates were unlikely to rise in the near term given the Brexit vote, saying: "The most likely scenario for a rise in interest rates is a strong economy."
According to a survey in the Financial Times this week, markets "have already priced in a 75% chance of interest rates being cut from 0.5% to 0.25% this week."
Barclays warned on Tuesday that Britain is "on the cusp of recession" following the vote to leave the European Union.