Speaking at the MICE conference in London, Cleary said mortgages written in the last two or three years have been subject to much more robust affordability checks that their pre-crash counterparts.
He said: “If you are considering the impact a rate increase will have on borrowers you need to distinguish between when mortgages were written. There will be a very different impact on different vintages of mortgages.”
Cleary said that Precise has factored in a 2% stress test to its affordability assessment to be certain the borrower can afford the mortgage if rates should rise in the future.
But he said that the bank is “likely to let steam out of the market slowly” with small rises over a period of time rather than a series of jumps in the rate.
“It is very difficult to predict what will happen but if the Bank increases rates by 0.25% it will have a minor impact on most borrowers.”
The pinch will be felt most by those borrowers who took out mortgages before the financial crisis when little, or in some cases no, tolerance was built in to the affordability test.
The Bank of England has elected to keep the base rate at 0.5% for the fifty-sixth consecutive month with no plans to increase it until unemployment drops below 7%.
When the Bank first announced its forward guidance which linked the base rate to unemployment it was assumed that rates would remain unchanged until 2016.
But recent improvements in the economy are now causing some to predict that unemployment will reach the 7% as early as 2015.
Cleary said that if rates do rise the remortgage market could be “sparked into life” to counteract the effects.
He said: “If rates rise people will start looking for alternatives. Lenders like HSBC are offering 1.99% so there are places for borrowers to go if affordability starts to get tight.”
