Raising Interest Rates Will Hurt Struggling Homeowners The Most

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Homeowners struggling to make ends meet will be even worse off if the Bank of England hikes interest rates this week, a financial charity has warned.

The Money Charity is concerned that even a slight rise in interest rates from their historic low of 0.25% could have severe implications for those struggling to balance mortgage repayments and personal debt.

While a modest rise of 0.25% could see mortgages increase by around £30 a month for some homeowners, those living in tight financial constraints may be forced to cut back on credit card or loan repayments to keep up payments to the bank.

That could lead to personal debt – which has a far greater interest rate than mortgages – soaring.

Another debt charity, Step Change, urged against overstating the impact of a small rate rise, but admitted that for those “living on the edge” it could have a serious impact.

Interest rates have not risen since July 2007, and were slashed to the then-historic low of 0.5% in March 2009 as a way of coping with the financial crash which had occurred just six months earlier.

But with inflation hitting 3% – and likely to increase – Bank of England Governor Mark Carney warned MPs last week a rate hike was likely in the “coming months.”

The group of nine economists who decide the base rate – the Bank of England’s Monetary Policy Committee – will announce on Thursday November 2 if rates will increase.

Speaking to HuffPost UK, The Money Charity’s Luke Humphrey said: “We are concerned the interest rise is going to hit people who are the worst off and make them even worse off.”

Referring to people with variable rate mortgages and personal loans, Humphrey said: “Somebody with both will have to prioritise between the two. That can lead to mortgages going in arrears and loans not being paid off. People who are juggling a lot of debt are going to find it a struggle.”

Which mortgages are affected by a rise in the interest rates?

Tracker rate: These are a fixed percentage either above, or sometimes, below, a certain rate – usually the base rate. When the Bank of England raises interest rates, these rise.

Standard variable rate: Similar to tracker mortgages, but these give the bank much greater flexibility to alter the interest rate on a loan outside of Bank of England decisions. However, an increase in the base rate is more than likely to be echoed in these mortgages.

Fixed rate: It might seem that fixed rate mortgages aren’t affected by a rise in interest rates, but seeing as the locked-in rate only lasts a certain number of years, when a homeowner moves to a standard variable they will be impacted by the Bank of England’s decision. Someone with two years left of their fixed rate deal might have been rubbing their hands with glee at interest rates of 0.25%. However, if the Bank of England pushes on with greater interest rate rises, they could be looking at 2-3% by 2019.

According to the Bank of England, 43% of homeowners are on tracker or variable rate mortgages – meaning they would be affected by any base rate rise.

Research by The Money Charity reveals just how precarious the finances of many in the UK are – with personal debt increasing.

Some £1.554 trillion was owed at the end of August 2017 – up from £1.5 trillion at the end of July 2016. This works out an extra £1,029.82 per UK adult.

Consumer credit debt per household stands stood at £7,492 in August, up from a revised £7,434 in July – and £538.78 extra per household over the year.

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