More than half of UK mortgage holders are unprepared for a hike in interest rates

2nd October 2014

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More than 50% of UK homeowners are in for a financial shock when interest rates inevitably rise according to new research from the Money Advice Service writes Philip Scott.

The government backed organisation’s survey of more than 3,000 homeowners found that when the cost of borrowing eventually increases some 56% have no contingency plan to deal with the higher costs.

Interest rates have now been stuck at the historically low level of 0.5% for more than five years, and the possibility of a rise is very real in the not too distant future.

Just last week, Bank of England governor Mark Carney urged that interest rates are set to rise in the coming months given that the UK economy is back on stronger ground. Carney said that the time for higher interest rates is “getting closer”.

He added: “Relative to the recent past, the economic outlook is much improved. While there is always uncertainty about the future, you can expect interest rates to begin to increase.”

Yet nearly half of UK mortgage holders, at 47% according to the study would find it difficult to meet an increase of up to £150 in monthly repayments.

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

The majority of borrowers, at 69% said they were already financially stretched when they originally took out their mortgage while 13% admitted they are currently living beyond their means. As a result almost one in five, at 19%, said they would really struggle to cover any rise in their monthly repayments.

Commenting on the findings, Nick Hill of the Money Advice Service said: “Mortgage holders need to be more mindful of the fact that a rise in interest rates is widely predicted – even for those on a fixed rate, as 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.

“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.”

A significant proportion of respondents admitted to little understanding of their current mortgage deal and what impact a rise in rates would have on them. In fact some 28% said they did not know what their current mortgage interest rate is, while a massive 59% said they had not calculated the impact that even a modest 1% hike would have on them.

Although 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.

Looking at the research, Sue Anderson of trade body the Council of Mortgage Lenders, commented: “Although we don’t know when rates will rise, 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.”

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

 

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