With the Bank of England Monetary Policy Committee confirming its base rate will rise by 0.5 per cent to 1.75 per cent, UK households face an immediate increase in interest payments of £1.67bn.
UK households are currently paying £24.1 billion annually in interest payments on floating rate debt that are likely to be immediately impacted by an interest rate rise.
With rates rising by 0.5 per cent, that means annual interest payments will increase to £25.7bn straight away, analysis of Bank of England data by audit and tax firm Mazars shows.
These debts include floating-rate mortgages, credit card debt, overdrafts and other unsecured personal lending.
Further increases in the base rate would have a yet more dramatic impact. If interest rates were to rise to 3 per cent, household interest payments would rise by a further £5bn to £29.9bn.
Floating rate mortgages
The majority of the rise in interest payments will be driven by floating rate mortgages.
UK borrowers currently have £249.9bn of floating-rate mortgages secured against their homes, at an average interest rate of 3.21 per cent.
The amount to be paid would be even higher were it not for a wave of borrowers switching from floating to fixed rate mortgages in recent months, Ed Thomas, director at Mazars, explained.
“This rate rise is going to add billions more to UK households’ costs – and it’s going to happen almost overnight,” Thomas told City A.M. this afternoon.
“People are already struggling with a huge burden of everyday costs on food, fuel and energy,” he said.
“Unfortunately, they will have to add a significant jump in the cost of their mortgages and other debt to their worries.”
“It’s likely that we’re going to start to see more personal insolvencies in the coming weeks and months as people simply become unable to service their debts alongside all those other costs, Thomas concluded.