New research has revealed that one in 20 variable rate mortgage holders could struggle to make ends meet if the Bank of England raises interest rates next week.
Interest rates were lowered to 0.25% in August last year to help boost the economy following the shock Brexit vote and are now forecast to rise to 0.50% next week.
According to a survey from Which?, one in 20 people on variable rate mortgages believe a rise would leave them struggling financially, while 31% feel their day-to-day living would be impacted.
A quarter of homeowners have a variable rate mortgage, meaning around 3.9 million people could see their monthly payments go up in the event of a rate rise.
If the Bank raises interest rates next week it will be the first of its kind for over a decade.
Harry Rose, Which? money editor, said: “With one in 20 of variable rate mortgage holders saying they would struggle to make ends meet, it’s important that preparation to deal with the impact of a hike starts now.
“Planning ahead with an effective budget is one simple way to stay on top of your finances. But we’d also like to see banks, lenders and utility companies reaching out to those deemed most vulnerable. For those concerned – speak to your bank and seek urgent advice. Plan now to avoid being caught out.”
Which? said that around 42% of mortgage borrowers have taken out a mortgage in the last 10 years and have therefore never experienced a Bank rate rise “raising vital questions around levels of awareness and preparation”.
If the Bank decides to hike interest rates the knock on effect could see lenders raise mortgage rates.
According to the Nationwide Building Society, a 0.25% rise in interest rates would see the payment on a £200,000 mortgage go up by £26.17 a month, or £295.32 a year.
This is based on a term of 20 years and an increase in variable rate from 3.74% to 3.89%.
The extent to which borrowers see an interest rate change will largely depend on the type of mortgage they have and whether it is tied to the base rate.
Fixed mortgages account for around half of the UK’s borrowers, while the other half are on variable rates.
Some variable rates track the base rate, while others do not. For those that do not, any changes will be up to the individual lender as the Bank Rate is one of a number of factors taken into consideration when determining the mortgage lending rate.
There are around 1.5 million borrowers with tracker mortgages, which automatically follow changes in the base rate and these people are likely to be the biggest losers. Those already on a fixed interest rate will not see any change until they renew.
Inflation climbed to 3% in September, slightly up on August’s reading of 2.9% and the highest level for half a decade. This has put further pressure on the Bank to raise interest rates to stop inflation spiralling out of control.
However, despite the possibility of a rate hike to 0.50%, many experts expect rates to stay low and any rise to be gentle.
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