MONEY_file000718343166More than half of all UK homeowners are in for a financial shock when interest rates inevitably rise. This worrying information comes from new research by the Money Advice Service.

According to Philip Scott of Mindful Money, the survey of more than 3,000 homeowners found that when the cost of borrowing eventually increases (and it’s a case of when, not if) 56% of homeowners have no contingency plan to deal with the higher costs.

Interest rates have been stuck at a historically low 0.5% for over five years and Bank of England Governor Mark Carney has said recently that rates are set to rise in the coming months, “given that the UK economy is back on stronger ground.” (Well, it is in the south-east anyway – Ed.)

According to the study, 47% of UK mortgage holders would find it difficult to meet an increase of, say, up to £150 in monthly repayments.

The Money Advice Service also found that 8% of mortgage holders were actually unaware that rates are likely to rise at all. That figure doubles to 16% for those under 35 years of age.

Financially stretched

The majority of borrowers, at 69%, said they were already financially stretched when they first took out their mortgage. 13% admitted they are currently living beyond their means; and as a result almost one in five said they would really struggle to cover any rise at all in their monthly repayments.

The survey found that 56% said they would find the money to cover any increases by cutting back on day-to-day basics, more than a third at 35% said they would have to use money from their savings, while 15% would need to find an extra job.

Importance of forward planning

Nick Hill of the MAS said: “… even for those on a fixed rate, their deal will come to an end sooner or later. Those who purchased their first property in the last five years will have only ever known historically low interest rates, but less than 10 years ago the interest rate set by the Bank of England was 5% higher than today.

“…it’s a good idea to review your personal finances, start looking at where you can cut back, and plan ahead now.”

Looking at the research, Sue Anderson of trade body the Council of Mortgage Lenders commented: “The monetary authorities have previously flagged that rises will be finely calibrated, so large sudden shocks are unlikely. By planning ahead now, mortgage holders can get a clear picture of what a rate rise would mean for their own repayments.

“Taking steps in advance to work out what the effect on your payments might be, and planning ahead, will mean that most borrowers will be able to cope by careful budgeting. On an average mortgage of around £120,000, a quarter point rise would typically add around £16 to the monthly payment.”

Based on this helpful multiplier, the effect on your own mortgage can be calculated.

Extra £2000 / year?

In a recent issue of Moneywise, Kate Faulkner provides lots of examples of the effect of rate increases; some of them worryingly high. She concluded by saying that if you have a £200,000 mortgage (that’s a fair bit above the national average; but maybe it’s the average for Moneywise readers), but it goes up to 5%, you’ll have an extra £2000 per year to find. That’s not a small sum.


For the Money Advice Service website, to find out how a rise in mortgage repayments would impact your finances, click HERE.

For the Mindful Money article, click HERE.

For the Moneywise site, click HERE.

… and I write on the fine art of budgeting in this blog; and in my book ‘Back to the Black … how to become debt-free and stay that way.’

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