Research shows UK mortgage holders think they will struggle with interest rises

One in five mortgage holders in the UK have said they would really struggle to find the extra money to cover any increase in repayments, new research has found.

Nearly half would find it difficult to cover up to £150 extra per month and over a quarter don’t know what their current mortgage interest rate is,’ according to the Money Advice Service which is urging home owners to plan ahead for anticipated rises in interest rates.

The study, of 3,007 UK mortgage holders, found that 56% have no contingency plans should interest rates rise, 47% would find it difficult to meet an increase of up to £150 in monthly repayments and 8% said they were unaware that rates are likely to rise at all, increasing to 16% for those under 35 years old.

Many mortgage holders said that their finances are stretched already. Some 69% described themselves as already financially stretched when they took out their existing mortgage and this rises to 77% for those aged under 35.

Also 13% admitted they are currently living beyond their means. As a result 19% said they would really struggle to cover any rise in interest rates in their monthly repayments.

A significant proportion admitted to little understanding of their current mortgage deal and what impact a rise in rates would have on them. Some 28% of mortgage holders said they didn’t know what their current mortgage interest rate is, with 59% saying they had not calculated the impact that a modest one per cent rise would have on them. And 3% admitted that they didn’t even know what their current monthly mortgage repayments are.

The vast majority of respondents, 84%, said an increase in interest rates would impact their finances. Many would therefore have to take immediate action to cover the increase in repayments.

Although over half, 56%, admitted they would find the money to cover any increases by cutting back on day to day basics, 35% said they would have to use money from their savings, while 15% would find an extra job, 5% would have to turn to credit cards, and 2% said they would take out a payday loan.

‘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,’ said Nick Hill, a money expert at the Money Advice Service .

‘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,’ he pointed out.

‘Unexpected costs often catch people out, however it’s better to be prepared for an interest rate rise, than to be caught off guard. We have two easy to use tools on the Money Advice Service website which are incredibly helpful for anyone to see how they can make savings to cover an increase in mortgage payments. Our Mortgage calculator works out how much a rise in rates will cost you in monthly repayments, whilst our Budget planner helps you see what’s left over after you’ve paid important bills and accounted for general living costs,’ he added.

However, the Council of Mortgage Lenders (CML) said its research shows that for most people gradual increases in rates are likely to manageable, even if not welcome. And if people take some sensible, practical steps now, most will be able to cope with what the Bank of England has previously flagged as a series of small rate rises whenever they finally come.

The MAS research suggests that around half of survey respondents would find it difficult to cover up to £150 extra a month. But the CML points out that £150 equates to around a two full percentage point increase on an average mortgage, something that markets see as unlikely until 2018, and a level of rate rise which commentators would expect to see accompanied by a parallel growth in earnings. In the short term, a quarter point rise would add something around £16 a month to an average mortgage.

But the CML shares the MAS concern about whether consumers are taking all the steps that they could to plan ahead for higher rates, and ensure that they are resilient to potentially higher payments on their credit obligations.

‘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,’ said CML head of external affairs Sue Anderson.

‘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,’ she added.

Separate research also shows that mortgage holders in England and Wales are at risk of being caught out by interest rate rises with almost half admitting to being uncertain of the rate charged on their existing mortgage.
 
The survey by the Principality Building Society found that while 87% are able to state the amount of their monthly mortgage repayment, only 52% know with certainty the interest rate of their current mortgage.
 
Almost a quarter of mortgage holders were unaware that a rise in the Bank of England base rate would ultimately be bad news for mortgage holders with 5% wrongly believing a rise in Bank of England rates would actually be good news for mortgage holders.
 
‘We are expecting a rise in the Bank of England base rate in the next few months but this is likely to be a very small rise occurring most probably in the first quarter of 2015. In real terms, a quarter per cent rise on the estimated average mortgage of £113,549 equates to around an extra £23.66 a month or less than £6 per week which should be manageable for the majority. However, rates will differ depending on the amount you have borrowed and period you have borrowed it for,’ said Julie-Ann Haines, customer director at the building society.