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The Bank of England reports that most households wouldn’t struggle with an increase in interest rates, but almost 500,000 households may find it hard to meet their mortgage payments if rates do go up.
The Bank of England has announced predictions that most people would be able to cope with their mortgage payments when it starts to increase interest rates, according to recent reports.
The base interest rate has been at a historic low of 0.5% since 2009 but is expected to start to go up … probably towards the end of 2015. According to the Bank of England, the majority of homeowners would still be able to afford their mortgage if interest rates were put up to 2.5%. Just 4% would struggle with their mortgage if the predictions are correct.
However, that still equates to 480,000 mortgage borrowers across the UK who wouldn’t be able to cope with a rise in interest rates. The figures also assume that household incomes would increase by 10% on average over the next few years for people to be able to manage mortgage repayments. If pay stays the same, 660,000 people might have to take action to be able to afford their mortgage.
People with debt hit hardest
People who spend more than 40% of their income on debt every month will be hit hardest by a 2015 interest rate rise, meaning some of the most financially vulnerable households across Britain may find it a struggle to make their mortgage payments. If you’re managing several problem debts and only just managing to repay your mortgage, an increase of around 2% on top of your mortgage rate could push you over budget. While a 2% increase may not seem like a lot, if your mortgage is currently on a standard variable rate of 3.5%, this would push it up to 5.5%. If you have a repayment mortgage of £100,000, this could mean that you would pay around £300 extra each month.
Though it’s certainly good news that fewer people would be put into financial difficulties by an interest rate rise than previously predicted, it’s worrying that those who would struggle to cope are likely to be the people who are already finding it difficult to manage their money. It can be difficult to try to repay various debts at once, and if you end up going into arrears on your mortgage, it may feel even harder to manage.
If you don’t pay mortgage arrears, your lender could seek to evict you. This is a last resort for lenders and, for most people, it doesn’t usually get that far. However, if you are in danger of being evicted over mortgage arrears, our guide could help you know where to turn.
Managing problem debt is difficult, and it could be even harder if your mortgage payments start to increase. If you’re having trouble meeting your current payments, you may want to think about talking to a source of expert help to try and get your finances back on the right track. You should certainly speak to your mortgage lender to explain your concerns about how you would cope when interest rates start to rise. They may well be willing to switch you on to a fixed rate mortgage which could protect you from higher mortgage rates, at least for a time.
by Emily BancroftBack to blog home