The Bank of England has warned households over the levels of debt being accumulated through mortgages, loans and credit cards.

Uncertainty over future interest rises and historically high levels of household debt pose "considerable challenges" to the UK’s financial stability the Bank warned.

BoE's deputy governor for financial stability, Sir Andrew Large said, "A change in economic conditions could trigger sharp asset price movements or market liquidity problems if investors simultaneously try to unwind common positions."

The warning came in the BoE's half yearly Financial Stability Review out today and comes just two days before the US Federal Reserve is likely to raise interest rates for the first time in four years, economists believe.

The ratio of household debt to income has soared from less than 100% in 1997 to around 135% now, with mortgage lending by banks growing by 10% a quarter and unsecured lending in the form of credit cards, loans and overdrafts by 13% a quarter over the past year.

"The UK household sector debt-to-income ratio has continued to rise rapidly, increasing households' vulnerability to any unexpected rises in interest rates or falls in incomes," warned the Review.

House price warning

The review repeated the recent warning by the Bank's Governor Mervyn King that property values may fall, stating: "Prospects for house prices are highly uncertain and, after the strength of house price inflation in recent years, the chances of a fall have risen.”

"If that were to happen, housing equity would be reduced and capital gearing raised, increasing household mortgage arrears and thus raising the risk of write-offs."

However, the review said that the UK banking system remained "well-placed" to withstand the impact of any upturn in bad debts and mortgage defaults.