Interest rate rises should worry banks, warns FSA

The Financial Services Authority (FSA) warned yesterday that variable rate mortgage borrowers and their banks could be in trouble when interest rates rise.

The watchdog said borrowers whose rates have fallen sharply or who have overstretched themselves more recently could be in for a shock.

Lord Turner of Ecchinswell, the FSA chairman, said: "We are pushing banks to think about the consequences for customers of rising interest rates and [about] their own asset and liability management."

The FSA said arrears, repossessions and losses on residential mortgages were much lower than during the downturn of the early 1990s, despite the greater severity of the recent recession.

But the regulator said mortgage borrowers on rates that fell sharply as the Bank of England slashed borrowing costs were vulnerable. It added that low rates on variable mortgages may have tempted borrowers to overstretch themselves last year, when borrowing at more than 3.5 times income returned to pre-crisis levels.

"Lenders need to be sure that such mortgages will remain manageable for borrowers when interest rates normalise," the FSA said in its Prudential Risk Outlook report.

Banks may also have shown "excessive forbearance" to mortgage borrowers by reducing their short-term payments, the FSA added.

Lord Turner said banks and their auditors should make sure provisions are taken against possible losses.

He added that the FSA's biggest worry was the commercial property market. The watchdog warned lenders to make sure they had "exit strategies for all their loans to commercial real estate companies".