KPMG partner John Kensington, editor of the accounting firm’s Financial Institutions Performance Survey (FIPS), said that despite falling over the past couple of years, impaired and past due assets were still well above pre-global financial crisis levels.

But he said low interest rates meant banks were managing to prevent these troubles spilling over into a flood of mortgagee sales, which currently account for only 0.2% of houses being sold.

Kensington said banks were managing their struggling assets well and low rates allowed them more flexibility when dealing with clients.

“What some banks are doing at the moment is that if someone can’t make all their payment, provided they can pay the interest component, they’re prepared to let them make part payment on the principal.”

But when interest rates started to rise, these sorts of arrangements would be put under pressure, he said.

“If you make people pay interest at 8% there are going to be even more people past due. If the rates go higher payment will be higher and there will be a larger interest rate component.”

Kensington said the issue of low interest rates went beyond those who were behind on their mortgage payments.

“Banks are writing lots of loans at 4.9% with 100% loan-to-value ratio; what will happen when the OCR and inflation pushes borrowing costs up to 7-8%? That’s one of the questions being asked.”