Interest rates hikes set to hit struggling homeowners hard

Households on variable rate mortgages with the lowest levels of disposable income are at risk of sinking further into debt if interest rates increase by 0.25 per cent.

PayPlan has warned that even this modest rise could have a ‘devastating’ impact on millions of Brits, especially those with a poor credit rating who are more likely to have a variable rate mortgage.

Jane Clack, money advisor at PayPlan, said:

“The average two year fixed rate mortgage in 2017 has an interest rate of about 1.5%*¹. However, these are only generally available to those with a good credit history. Our clients are typically stuck on a variable rate mortgage, which means that they are paying over 4% and that any interest rate rise will immediately increase their payments.”

The warning follows research from the Money Advice Service* ², which identified 12.7 million people as ‘squeezed’ – equating to just under a quarter of the UK adult population. Individuals in this group are typically working aged adults, half of who have families, major financial commitments and little to cushion them from ‘income shocks’ relating to the changing economy.

Jane adds:

“Given the experience of our clients, it is likely that the most vulnerable families are already paying the highest mortgage rates. Despite being the group least able to afford an increase in payments, they are likely most affected by any rise.”

Referring to a sample of 14,000 PayPlan clients with a mortgage and already undergoing a Debt Management Plan (DMP) to help manage existing personal debt, a 0.25 per cent increase would increase the average mortgage payment by £22 per month. For a family living on a limited budget this will have a significant effect on their financial health.

Explaining further, Jane said:

Interest rates have been at rock bottom for so long, so this will inevitably be a shock to many. For householders on low incomes, or with poor credit scores, variable rate mortgages presented a viable way to get on the property ladder.

“With five million variable rate mortgages in the housing market, it is only a matter of time before people who are struggling to make ends meet default on their repayments. When families are already relying on credit cards for essentials like food, there is no way they could afford further increases to their mortgage payment each month.

“Of course, for those already in a debt management plan, like our own customers, there’s help and support available. My concern is for those who haven’t had the courage to speak out about their problems and are struggling in silence. An extra £22 per month could be a tipping point, so my advice is to speak out now and get some free help.”

“Anyone in this situation can address their personal debt levels before the impact of interest rates really begin to bite. By getting on top of their finances now, and making credit card and loan repayments more manageable, homeowners have a better chance of absorbing higher mortgage costs and avoiding serious debt.”

PayPlan has launched an interest rate calculator to help clients work out how a rise may affect their monthly mortgage payments. For more information visit: https://www.payplan.com/out_of_interest/

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