The Bank of England has ordered City regulators to assess the "significant" threat from a sharp rise in interest rates to debt-laden households, banks and finance firms.
In its quarterly financial stability report, it echoed comments to MPs by outgoing governor Sir Mervyn King on Tuesday that borrowers face significant distress when the bank's base rate starts to rise from its historic lows.
UK borrowers have benefited in recent years from the 0.5% base rate - in place since March 2009 - helping cash-strapped households to keep on top of mortgage repayments, despite a fall in real incomes, with lenders also relaxing debt demands through forbearance.
The Bank said today: "The significant cohorts of UK borrowers could experience financial difficulties if interest rates were to rise during a period of subdued income growth.
"A rise in interest rates without a strengthening in income could significantly increase borrower distress and losses to banks."
It added that UK household debt remains high as a proportion of income at around 140%, with UK bank lending to households and non-financial firms at around £1.4tn.
The bank warned that around 9% of UK mortgage holders will have to take action - such as working longer hours, cutting back on essentials and changing mortgage - if rates were to rise by just one percentage point.
It also said a rise in rates could hike bad debt losses at banks, as well as increase their funding costs.
Sir Mervyn had told the Treasury Select Committee of MPs: "I think the idea we are about to return to normal levels of interest rates is premature, and one of the reasons we are not about to return is precisely because so many households have such a high level of household debt."
It was his final appearance before MPs before his retirement at the end of the month.
The consequences of rising rates will be an issue his successor Mark Carney will have to consider.
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