Nearly four in 10 people struggling with debt are unaware that interest rates could rise this year despite the significant effect it could have on their finances, a new study has found.
The Money Advice Trust warned that those in existing financial difficulty were unprepared for the interest rate hike and likely to be at the sharp end of a rise.
The Bank of England decided today to keep interests rates at 0.5%, with eight of the nine rate setters on the Monetary Policy Committee voting for no change.
The charity said that the government, financial services industry and advice agencies faced a “significant challenge” in helping households to prepare for a higher interest rate economy.
It is also concerned that public debate on the impact of rises has only focused on households with mortgages, ignoring the impact of those in the rental sector who are likely to face higher rents as landlords pass on the additional cost to their tenants.
More than three quarters (76%) of National Debtline callers surveyed by the Money Advice Service who were aware that interest rates may rise expressed concern about the impact on their financial situation. A similar number (77%) said they also expected to cut back on their household spending to cope with interest rate rises.
Last week, George Osborne said that UK interest rates will rise at some point as he warned that Britain faced a dangerous “cocktail of new threats from around the world.”
Speaking to business leaders in Cardiff, he said that he expected Britain to follow the Federal Reserve’s decision to raise interest rates last month.
Joanna Elson, chief executive of the Money Advice Trust, said: “After nearly eight years of ultra low rates, we need to do much more as a society to prepare people for a higher interest rate economy. That means government, the financial services industry and advice agencies like National Debtline working together to communicate clear, consistent messages to the public on what steps they should take.
“It is likely, of course, that rises will be slow and gradual, and will not cause hardship for the majority of homeowners in an economy that is recovering. For many of the people we help at National Debtline, however, even a small rise could make a financial situation that is already difficult, much worse.
“Crucially, we need to recognise that this challenge goes far beyond people with mortgages. Higher interest rates are likely to cause difficulty for private renters too, as landlords pass on their additional costs to their tenants. The need to prepare those in private rented accommodation for higher costs is just as important.”
Previous research by the Building Societies Association found that 52% of borrowers say they will struggle when interest rates rise.
The Money Advice Trust and Building Societies Association have produced a leaflet to support borrowers who may be in paying their mortgage when rates rise, which is available here.
National Debtline’s five steps to prepare for interest rate rises
1) Prepare a household budget
2) If you have a mortgage, consider fixing now
3) Deal with existing debts now
4) Maximise your income and re-examine your costs
5) Seek free advice if you are struggling
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