Interest rates warning: ‘Vulnerable’ households would be hit if rates rise by just 0.25%

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Savings rates will remain low for the foreseeable future, as retail banks continue to be limited by the Bank of England’s decisions. Yesterday, the central bank elected to keep the Base Rate at 0.1 percent, which in turn limits what’s available to consumers.

Savers may be disappointed by this, as their cash sits in current and savings accounts which pay next to nothing on their pots.

However, new research from Mazars, the international audit, tax and advisory firm, showed savers may want to be careful with what they wish for.

According to its findings, UK households would be hit by an immediate increase in interest payments of £976million if interest rates were to rise by just 0.25 percent.

In analysing data from the Bank of England, Mazars highlighted UK households are currently paying £17.2billion annually in (floating rate) interest payments which are likely to be affected immediately by an interest rate rise, including on variable-rate mortgages, credit card debt and other personal lending.

Paul Rouse, a Partner at Mazars, commented: “While the Bank of England is unlikely to raise interest rates in the short term, if inflation continues on its current course, there could be no option but to do so.

“UK households need to be aware of the potential consequences of interest rate rises on their finances, should inflation force a change of course from the bank.”

With the current base rate sitting at 0.1 percent, Mazars warned if rates rose by just 0.25 percent, these annual interest payments would increase to £18.2billion “almost overnight”.

Further increases in the base rate would have an “even more dramatic impact”, as if interest rates were to rise by 0.5 percent, household interest payments would leap by a further £1billion to £19.2billion.

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Should rates rise by just one percent, interest payments would rise even further to an “eye-watering” £21.1billion, almost £4billion above current levels.

For comparison, the Bank of England Base Rate sat at 4.5 percent in October 2008, just as the financial crisis hit and before the central bank started progressively lowering rates.

Mazars explained the majority of the rise in interest payments would be driven by floating rate mortgages.

UK borrowers currently have £325billion of floating-rate mortgages secured against their homes, at an average interest rate of 2.29 percent.

Mazars argued while the Bank of England has been focused on keeping the cost of borrowing low during the pandemic, this may have to change should inflation continue to rise.

Inflation stood at around 2.4 percent in July in 2021, having been less than one percent for most of 2020 as coronavirus continued to wreak havoc on the economy.

Despite this, the Bank of England expects inflation to peak at three percent this year but many experts expect it to rise even higher than this as 2022 approaches.

Recently, Andy Haldane, the Bank of England’s outgoing chief economist warned inflation could reach almost four percent this year, which may force the central bank to perform a “handbrake turn” and raise interest rates.

Mr Rouse concluded: “Many UK households are in a vulnerable position when it comes to debt.

“While unlikely to happen immediately, a small interest rate rise could make a big difference to monthly budgets, potentially leaving some in difficulties.”

Now may be the best time to look for new deals for mortgage holders who are struggling with high repayments.

According to recent research from Moneyfacts.co.uk, the “incentive” to switch mortgage deals has strengthened as Eleanor Williams, a Finance Expert at Moneyfacts.co.uk, explained.

“While undoubtedly the pandemic has had a polarising impact on many households and their income levels, our research shows that for eligible borrowers, this could be a prime time to consider a new mortgage,” she said.

“This is particularly true if a borrower is on an Standard Variable Rate (SVR), as the difference in monthly repayment between being on the current lowest directly available fixed rate on our records of 0.91 percent, compared to the average SVR of 4.40 percent, could work out over £350 per month, or an eye-watering £8,500 if on the revert rate for 24-months – the typical term of a two-year fixed rate.

“After an unprecedented 18-months in the mortgage sector, some positivity is beginning to become evident with month-on-month falls in average fixed rates and record-low fixed rate deals launched recently.

“Despite the volatility seen in the market since 2020, those who have a five-year fixed rate which is now maturing may be pleasantly surprised that based on the average five-year fixed rate of 2.78 percent, they may be able to secure a lower rate now than they did in 2016, even if they are not in the lower Loan-to-Value (LTV) brackets. Those who are coming off a two-year fixed rate deal may be disheartened to see that the equivalent average fixed rate has risen by 0.06 percent compared to what they may have secured in 2019, but when compared to the average SVR, if they fall onto a revert rate, they may face an increase of nearly two percent in rate – which could equate to £204 per month, or over a 24-month term of a deal, they could be paying out over £4,800 more in payments.

“It would be wise for borrowers to confirm what options may be available to them for a new mortgage, even if perhaps their existing lender is unable to offer a new deal, as eligibility criteria and requirements vary from lender to lender.”

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