Nov 07

Variable rate mortgage holders prepare for interest rate rise

Homeowners on variable rate mortgages who are already struggling to make ends meet are at risk of finding themselves in serious financial difficulty if they do not make plans to cope with the rise in interest rates, warns a leading free debt advice provider.

The 0.25 per cent Bank Rate rise announced on Thursday, although modest, could have a serious effect on many families. Those with a poor credit rating are more likely to have a variable rate mortgage, and will therefore see an immediate increase to their monthly payments.

Jane Clack, money advisor at PayPlan, is concerned that the higher rates will have the most serious impact on those who can least afford them.

“We have found through personal experience with our own clients that many low income families living close to their means opted for a variable rate mortgage as this was the only viable way to buy their own home.

“Even though the average interest rate for a two year fixed rate mortgage in 2017 was around 1.5%*1, the variable rates offered to those with poor credit ratings were typically over 4%, resulting in far higher monthly payments.

“Research into 14,000 of our clients with a mortgage and already undergoing a Debt Management Plan (DMP), a free service offered by PayPlan to consolidate and pay off debts, shows that the 0.25 per cent rise in rates will result in, on average, a monthly payment increase of £22.

“With those already living on a limited budget, even this seemingly modest amount could have a disastrous impact on their level of disposable income. Many families in this bracket are already struggling to cover the costs of essentials, such as food.”

Recent research from the Money Advice Service* 2 identified 12.7 million people in the UK as ‘squeezed’ – around 25 per cent of the adult population. Those in this group are typically of working age and half have families and major financial commitments, with tight monthly budgets affording no breathing space to accommodate any sudden increased costs.

The interest rate rise is the first in a decade, so for many homeowners, it will be the first time they have had to find additional money for their monthly mortgage payments. There is also a concern that last week’s announcement will pave the way for further increases in interest rates in the near future.

“The Bank Rate hike is an indication that rates are starting to rise – certainly we expect it to only go one way now, especially having been kept so low for so long. There are five million variable rate mortgages in the housing market, so each rise in rates will have a tangible financial effect on those homeowners,” explained Jane.

“Our advice to those who are concerned about making ends meet is to get in touch with a professional, free debt advice service, who will be able to provide invaluable help and support.

“Addressing your level of personal debt to set you up to better cope with the impact of any interest rate rises will help you to absorb higher mortgage costs and stop the cycle of spiraling debt.

“The overwhelming sense we get from our customers once we have arranged a debt management plan for them is one of relief, at finally getting back on track and getting support to improve their financial health. It really can be a life changing process.”

To assist clients in calculating the impact of the interest rate rise on their monthly payments, PayPlan has launched an interest rate calculator. For more information visit:




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