Mortgage rate increase will mean repayment shock for millions

05 November 2015

A rise in interest rates will result in monthly repayment shocks for millions of homeowners who are already living on a tight budget, according to our autumn survey of more than 500 PayPlan clients who have a mortgage.

We found that 65% of people living in their own mortgaged property felt that a rate rise would have ‘severe impact’ on their finances, with 72% saying they could not cope with a £100 increase in their monthly payment. With 40% of people not having experienced a rate change in the last five years almost a quarter said they were “extremely worried” about potential rate increases.

An opportunity for dialogue

There is a real opportunity here for the debt advice sector and lenders to work together to help the many borrowers who are vulnerable to repayment increases to plan ahead and minimise any shocks. 90% of borrowers have not spoken to their lender about their concerns and a joined up approach between lenders and advice providers could encourage consumer engagement and preventative activity.

The people we asked had an average mortgage balance of £103,000, requiring a monthly repayment figure of £625. This shows that while many of us can manage a six-figure mortgage on current rates it wouldn’t take much to make life difficult. Only 6 per cent described themselves as not worried at all about a rate increase.

We plan to use our creditor roundtable forums to debate this topic and share best practice in countering interest rate increase susceptibility. We want to talk about initiatives such as prioritising mortgage payments by re-balancing other credit commitments appropriately after a rate increase and providing broader budgeting advice to over-indebted clients to promote payment sustainability.

Real concern about rate increases

Our research shows that there is a real concern about rate rises but there is little dialogue between lenders and borrowers about it. A quarter of those surveyed described themselves as “extremely worried” about rate rises. Customers are used to low rates and little or no increases and this means tough sacrifices will have to be made to cope with repayment increases.

We asked what people could do to help cope with mortgage repayment increases and here’s how our clients responded:

  • 54% would have to cut back on essential living costs
  • 8% would have to seek additional work
  • 20% would have to reduce other debt payments
  • Only 6% considered switching mortgage a solution
  • The most popular ‘other’ answer was to “sell up”.

The kind of support people said they would like included help arranging fixed rates; being told the cost of changing to a repayment mortgage; being offered part payment-part interest arrangements; and seeing exactly what a 1% rate increase would mean on a £100,000 mortgage monthly repayment. This opens the way for an improved dialogue between lenders, debt advisers and borrowers. If you would like to get involved in this debate please get in touch at peter.munro@payplan.co.uk

Of those we surveyed:

  • 92% are up to date with their mortgage payments
  • The average interest rate of those responding was 4.75%
  • The average balance £103,448
  • The average monthly payment was £625
  • Average income £30,310
  • 86% are with a prime lender; 14% with a sub-prime lender
  • 54% are on the lender’s standard variable rate
  • 17% are on a fixed rate mortgage (39% of which don’t know when the fixed term ends)
  • 17% are on tracker products
  • 11% do not know what type of mortgage they have

Monthly repayments and increases:

Mortgage

3%

4%

Hike

5%

Hike

100k

£474

£528

£54

£585

£57

150k

£711

£792

£81

£877

£85

200k

£948

£1,056

£108

£1,169

£113


mortgage rate increase infographic  
  

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