Ticking time bomb rate hike
MILLIONS of debt-laden Britons are sitting on a “ticking time bomb” and a small rise in interest rates will destroy their financial security.
With consumer debt at record highs households will pay billions in extra interest when the Bank of England hikes rates, experts warn.
A rise of just 0.5 per cent would cost £3.4billion in the first year alone, accountancy firm Moore Stephens has calculated.
British households owe more than half a trillion pounds on variable rate mortgages and consumer debt, with interest repayments totalling £39.2bn a year. If base rates rose from today’s 0.25 per cent to 0.75 per cent, that figure would jump to £42.6bn, some £3.4bn more and should interest rates hit 1 per cent, household interest payments would leap to £46bn, costing an extra £6.8bn in annual interest charges.
Most of this is mortgage debt but Britons have also borrowed record levels on credit cards, overdrafts, car loans and unsecured personal loans.
PRESSURE BUILDS
Last month, the Bank of England’s monetary policy committee (MPC) narrowly voted 5-3 to hold interest rates at 0.25 per cent.
Bank governor Mark Carney and MPC members are torn over the pace of future rate hikes but pressure is rising, especially with the US Federal Reserve hiking rates four times since 2015. Moore Stephens’ Michael Finch says: “Seven years of near-zero interest rates, rising house prices and ballooning consumer credit have made a ticking time bomb of debt. A base rate rise might trigger it.”
Interest rates must rise soon to curb inflation. “Households need to be aware of what that would mean for their debt repayments,” he says.
Finch thinks more than eight years of record low rates have created a generation for whom a bank rate over 1 per cent is unheard of. “A huge number of families may get a rude awakening once rates start to return towards what has historically been their normal level.”
Many who stretched themselves to afford a home will struggle to make repayments if their mortgage rate hits 5, 6 or 7 per cent. “That will get worse as fixed rate mortgages come to an end and homeowners are forced to come to terms with higher interest rates,” Finch adds.
David Clarke at Positive Money says the Bank has limited tools to restrain borrowing. “Its only option is raising interest rates which could cause considerable harm.”
RATES CLIMB
Charlotte Nelson at MoneyFacts. co.uk says mortgage rates are already starting to creep up, notably for those with smaller deposits. “The average two-year fixed rate at 95 per cent loan-to-value (LTV) has increased by a shocking 0.35 per cent since the start of the year. Five-year fixes are climbing too.”
This is, for the most part, down to growing inflationary pressures with consumer prices hitting a four-year high of 2.9 per cent in the year to May, before retreating slightly in June. Nelson explains: “As inflation rises, borrowers’ incomes get eaten away and the probability of a default rises.”
Lenders are responding to the growing danger of mortgage defaults by hiking their lending rates. The upward pressure on rates looks set to continue and Nelson adds that overstretched borrowers need to act fast. “Make the most of today’s low rate deals before their time is up.”
Households should also aim to pay down their mortgages and other debts where possible, to prepare for higher borrowing costs, she adds.
Rowan Dartington’s Guy Stephens warns: “While we persist with the cheapest finance ever seen, a debt bubble is quietly building.”
Personal debt is now greater than before the financial crisis and a small increase in rates will send shockwaves through the economy, he adds. “It will cause all sorts of personal hardship. We have learnt nothing from the various booms and busts of the past.”