JUST a single percentage point rise in interest rates would be enough to force nearly one in ten mortgage-holders to take drastic action so they could afford debt payments, the Bank of England has warned – while a two point increase could affect those holding around 20% of mortgage debt.

The Bank has asked regulators to assess the impact of any rate rise on borrowers after four years with Base Rates at just 0.5%.

It has also loosened rules governing how much banks have to hold in easy-to-sell financial instruments, allowing them to offload some £70 billion of assets, in an effort to boost lending and boost the economy.

Bank Deputy Governor Paul Tucker said: "If interest rates were to rise without an improvement in income, the debt servicing burden would increase."

The Bank is worried because although debt to income ratio for UK households have fallen by 30 percentage points since 2008, it remains at around 140% – well above comparable figures for the United States and eurozone.

"A rise in interest rates, without a strengthening in income could significantly increase borrower distress and losses to banks," the Bank claimed in its Financial Stability Report published yesterday.

"One indication is that households accounting for 9% of mortgage debt would need to take some kind of action – such as cut essential spending, earn more income (for example, by working longer hours) or change mortgage – in order to afford their debt payments if interest rates were to rise by just one percentage point.

"This would rise to 20% of mortgage debt if interest rates were to rise by two percentage points."

The Bank said that while the number of new mortgages on fixed rates is higher than at any time since 2004, the share of mortgages with fixed rates in the overall stock is close to an historical low, making borrowers more vulnerable to a rise in rates.

Currently, mortgage write-offs are "significantly below" levels seen in the property market crash of the early 1990s as interest rates have remained low.

The Bank's Financial Policy Committee (FPC) has asked regulators at the Financial Conduct Authority and the Prudential Regulation Authority to assess the vulnerability of borrowers and financial institutions to sharp upward movements in rates.

Mr Tucker cautioned that the problem would only occur if rate rises happen before the economic recovery is under way and wages are rising.

"Interest rates should only go up when we have achieved escape velocity when incomes will be improved," he said.

The FPC concluded that with banks having access to cheap funding through the Bank of England and others, it could slow the implementation of new liquidity rules.

This, it said, "could free up liquid assets that banks could use to support lending to the real economy or to improve their profitability by retiring expensive debt. Its proposal of a liquidity coverage ratio of 80%, rising to 100% in 2018, would allow the big four banks to sell £70bn of liquid assets it assessed.

Mr Tucker said: "The road to rebuilding the resilience of the financial system, so that it can support our economy as it should, will be long.

"But a real start has been made, which will help underpin economic recovery in the period ahead."

Gerard Lane, analyst at Shore Capital, took a positive view of the report: "We remain positively disposed to the domestic banks sector as the UK economy recovers."