British householders face £3.4 billion in extra interest payments a year if the Bank of England raises the base rate, experts warn.
Research for The Times by Moore Stephens, the accountants, reveals that there are £591 billion of floating mortgages — loans that are on standard variable rates (SVRs) or base-rate trackers. There are believed to be about 4.5 million British households on tracker mortgages or SVRs who will be hit directly by a rate rise. About 1.5 million are on trackers, 2 million languish on SVRs after allowing their previous fixed-rate deals to lapse and a further million are “imprisoned” on the SVR after being refused a new fixed deal.
According to Moore Stephens, a 0.5 per cent rise in the Bank of England base rate to 0.75 per cent would mean £3.4 billion more interest paid by British homeowners each year (a total of £42.6 billion).
Those with car loans or credit card debt will also be hit.
“Near-zero interest rates, rising house prices and ballooning consumer credit have created a ticking time bomb of debt
Michael Finch, a partner at Moore Stephens, says that people on SVRs— with an average interest rate of 4.6 per cent — should move to fixed-rate deals. “Seven years of near-zero interest rates, rising house prices and ballooning consumer credit have created a ticking time bomb of debt — a rise in the base rate might set it off,” he says. “There is a growing need to raise interest rates to keep inflation under control, but households need to be aware of what that would mean for their debt repayments.
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“Rates being so low for so long have created an entire generation of people for whom a bank rate above 1 per cent is unheard of. There are a huge number of families with floating-rate mortgages who may get a very rude awakening once rates start to return towards what has historically been a normal level.”
The Bank of England came close to raising the base rate last week when three of the eight members of the monetary police committee voted against leaving rates at 0.25 per cent.
However, Ben Broadbent, a close ally of Mark Carney, the governor of the Bank of England, said that the economic situation was so uncertain he could not recommend a rise.
Yet figures revealed by The Times last week show householders rushing to secure fixed-rate mortgage deals while interest rates are at an all-time low. LMS, the conveyancer, said that the number of people remortgaging went up 8 per cent in May, with a third opting for five-year fixed rates.
The amount handed out by banks and building societies reached £22.1 billion in June, up 9 per cent in a month.
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Mohammad Jamei, a senior economist for UK Finance, the banking trade association, said that market conditions were worsening.
“A period of belt-tightening now seems to be under way as inflation begins to erode consumer spending power and consumer confidence weakens,” he said.
Mortgage deals remain rock bottom at the moment. Leading the pack for a two-year fixed-rate mortgage is Yorkshire Building Society (0.99 per cent with £1,730 of fees), followed by Skipton Building Society (0.99 per cent, £1,995 of fees) and Halifax (1.03 per cent, £1,429 of fees).