- Floating rate mortgage holders face £1.5 billion more in mortgage payments alone
- Payments would have been higher if so much switching had not happened in last few months
- Adds immediate £68 in increased payments for average UK household
With the Bank of England Monetary Policy Committee set to meet on Thursday, research from international audit, tax and advisory firm Mazars shows UK households face an immediate increase in interest payments of £1.9 billion if interest rates were to rise by just 0.5%.
Analysis of Bank of England data by Mazars shows UK households are currently paying £17.5 billion annually in interest payments on floating rate debt that are likely to be immediately impacted by an interest rate rise. This includes floating-rate mortgages, credit card debt and other unsecured personal lending. Consumers will be hit by further rises as fixed rate debt is converted to floating rate.
At present the Bank of England’s base rate is 0.1%. If rates rose by just 0.25%, annual interest payments would increase to £18.4 billion almost overnight.
Further increases in the base rate would have a yet more dramatic impact. If interest rates were to rise by 0.5%, household interest payments would rise by a further £1bn to £19.3 bn. Interest payments would rise further still, to an eye-watering £21.2 billion – almost £4 billion above current levels – should there be a rate increase of 1%.
Paul Rouse, Partner at Mazars, says: “The UK household debt load is now so big, that even the most marginal increase in interest rates adds almost £1bn in extra costs almost overnight.”
“It is important that UK households are prepared for the impact of interest rate rises on their budgets. After the weekly grocery and energy bills, mortgage and credit card repayments could be the next items to become more expensive.”
Mazars explains that the majority of the rise in interest payments would be driven by floating rate mortgages. UK borrowers currently have £296 billion of floating-rate mortgages secured against their homes, at an average interest rate of 2.33%. Mazars says the amount to be paid would be even higher were it not for a wave of borrowers switching from floating to fixed rate mortgages in recent months.
Paul Rouse adds: “With just a fifth of mortgage debt on floating rates, most UK mortgage borrowers are somewhat insulated from a rise in interest rates – for the short term at least. However they are likely to feel the pain of increased rates the next time they come to remortgage.”
“Many households will have been using credit cards and payday loans to manage rising energy bills and mortgage or rent repayments. With interest rate increases, those payment methods start to become more expensive and unsustainable in the long term. These are the triggers that push people over the edge into unmanageable and spiralling debt problems.”