UK mortgage holders are unprepared for potential increases in interest rates, new research from the Money Advice Service reveals.
The study, of 3,007 UK mortgage holders, found that 56 per cent have no contingency plans should interest rates rise – despite almost certain predictions that rates are set to rise soon.
Worryingly, eight per cent said they were unaware that rates are likely to rise at all, increasing to 16 per cent for those under 35 years old.
Taking action
The vast majority of respondents (84 per cent) said an increase in interest rates would impact their finances. Many would therefore have to take immediate action to cover the increase in repayments.
Although over half (56 per cent) admitted they would find the money to cover any increases by cutting back on day-to-day basics, over a third (35 per cent) said they would have to use money from their savings, while 15 per cent would find an extra job. Five per cent would have to turn to credit cards, and 2 per cent said they would take out a payday loan.
Nick Hill, a money expert at the Money Advice Service comments:
“The smallest increase in mortgage repayments can make a significant impact on a family budget – especially for those people who are already financially stretched. So it’s a good idea to review your personal finances, start looking at where you can cut back, and plan ahead now.
“Unexpected costs often catch people out, however it’s better to be prepared for an interest rate rise, than to be caught off guard.”
Tough, but not impossible
Despite the concerns of the Money Advice Service, the Council of Mortgage Lenders (CML) has done its own research showing that, for most people, gradual increases in rates are likely to be unwelcome but manageable.
The council says if people take some sensible, practical steps now, most will be able to cope with what the Bank of England has previously flagged as a likely “baby steps” trajectory of rate rises, whenever they finally come.
The Money Advice Service’s research shows 47 per cent of mortgage holders would find it difficult to meet an increase of up to £150 in monthly repayments.
But as the CML points out, £150 equates to around a two full percentage point increase on an average mortgage – something that markets see as unlikely until 2018. It’s also hoped that wages will rise over that time.
In the short term, a quarter point rise would add something around £16 a month to an average mortgage.
But the CML agrees there are concerns about whether consumers are taking all the steps that they could to plan ahead for higher rates, and ensure that they are resilient to potentially higher payments on their credit obligations.
Check out the Money Advice Service website for budgeting tools to help you understand what you can afford.
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CML’s simple steps to preparing for an interest rate rise
- Remind yourself of what rate you are currently paying, whether it is fixed or variable, and when the deal and any associated early repayment charges expire.
- Use the MAS mortgage calculator to work out what rate rises of different sizes would mean for you, and make sure you could cover this additional amount.
- Having done this, if you think you would struggle, go through a budgeting exercise and consider whether there are any areas of spending you could reduce. There is an extremely practical self-help budget planner on the National Debtline website.
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