‘Prepare to feel the pinch if you’ve borrowed too much’

Iain Clacher, an associate professor at Leeds University Business School, also warned that the stock market is likely to experience “quite a large correction” when interest rates finally start to rise from historic lows.

Mr Clacher made the comments after a Bank of England official warned of the dangers of “lingering too long in the sun” with low interest rates. Kristin Forbes, a member of the Bank’s rate-setting Monetary Policy Committee (MPC), said that waiting too long for an increase risked undermining the recovery.

A fall in inflation - expected to have remained at zero in July when official figures are published - has eased any pressure for a rates hike.

Ms Forbes, writing in the Daily Telegraph, said it was tempting to put off any increase while enjoying the flat cost of living, higher wages and strong economic growth, but compared this to the dangers of sunbathing.

“Linger too long in the sun and your skin may take on a slightly pink glow,” she said. “While you probably won’t want to move from your comfortable spot in the sun, if you ignore the warning signs, you may have a painful sunburn that evening.”

Mr Clacher said: “It is not a question of if, but when the rate rise will come. Many commentators suspected the last quarter of this year, but it is now looking like next year. This is a concern for many analysts. First, small increases in the interest rate are going to impact upon the UK property market.

“With house prices booming in many places it is likely that an increase in the base rate will impact those borrowers who have overextended themselves hoping for ever increasing house prices. Sadly, there is a correction coming and it is only a matter of time before those who have borrowed too much start to feel the pinch. Interestingly, the discussions talk of a rate hike. This is not what will happen, it will be a slow steady transition to a more ‘normal’ rate. If a 0.25 per cent increase means an individual cannot afford their mortgage, then sadly, the mortgage probably should not have been approved.

“The bigger concern is the impact that a rate rise will have on the stock and bond markets. The stock market is experiencing its third longest bull run ever, and this is driven by cheap credit and the nationalising of private sector bad debts.

“Once the cheap money is no longer available then there will be a fall in liquidity in the market and the stock market is likely to experience quite a large correction.

“Given Mark Carney, the Governor of the Bank of England has been talking to large fund management houses about this and their ability to cope, it seems that there will be a correction not only in the property market, but the financial markets as well.

“Ultimately, there is only so long you can push economic fundamentals down the road, and it is likely that we are coming to the end of the road and there is going to be some more pain ahead in the coming year.”

Jonathan Oxley, the chairman of the Institute of Directors in Yorkshire, said he welcomed Ms Forbes’ comments.

He added: “The IoD has for some time been arguing against retaining abnormally low interest rates at a time when the economy has returned to something approaching normality. There are risks in allowing both consumers and businesses to get used to relying on rates remaining at an all time low.”

Lucy Thornycroft, regional director of the CBI, said the Governor’s recent remarks about inflation shooting through the target in two years’ time imply that rates could rise ahead of current market expectations.

She added: “While inflation is likely to bounce around zero for a few more months, following further falls in oil prices and continued strength in sterling, the stronger outlook for demand outweighs these temporary effects and in all likelihood interest rates will rise sooner than markets expect.”