Following on from the Bank of England Monetary Policy Committee news that is has voted to increase interest rates by 0.25% to 0.5% – the first rate rise since 2007. The credit and collections industry has responded to the rate change.
Joanna Elson OBE, Chief Executive of the Money Advice Trust, the charity that runs National Debtline, said “This first rate rise in more than a decade could be a turning point for many households. Future interest rate rises are likely to be slow and gradual – but even small increases in costs could cause significant problems for many households.
“High levels of household debt, a renewed squeeze on wages and now the prospect of higher interest rates threaten to be a dangerous mix for many households. Calls to National Debtline are already up 10 percent this year, and we expect demand for debt advice to increase significantly in a higher interest rate environment.
“It is vital that lenders, government and advice agencies work together to make sure people affected receive the support they need.”
Mike O’Connor, Chief Executive of StepChange Debt Charity said “With incomes already squeezed, even having to pay £20 more on average per month on a mortgage after today’s rise could push people who are just holding on by their fingertips from paycheque to paycheque, into the red. We estimate one in 10 of our clients with a mortgage will end up with a deficit budget, and some households will need support to adjust.”
“With more pressure on household budgets, this highlights the need for government to set out a clear strategy to help households get through financial difficulties. As a start, we urge the quick introduction of the statutory breathing space scheme promised last week.”
David Rankin, Director of Insolvency at Creditfix said“This interest rate rise, while seemingly a positive move for the economy, will jeopardise the precarious financial stability of thousands of people across the country who are just about managing.
“This interest rate rise is bad news for the vulnerable middle who are on the cusp of financial ruin. The reality is that a huge proportion of people who are close to experiencing severe financial problems are actually homeowners – and even the slightest increase in their mortgage repayments could trigger severe financial difficulties. They keep their anxiety under wraps while supporting their families. They often work multiple jobs and are silently oppressed by the burden of owing creditors.
“In the latest Personal Debt Index, which compiles data from over 60,000 people across the UK seeking financial support, the average unsecured debt level was £20,136 and just under 10% of these individuals own their own home. 81.36% are in employment, and 5.00% are retired.
“The truth is that this interest rate rise will impact us all – but it will hit hard-working British families and homeowners who are already struggling especially hard.”
UK Finance Head of Personal Eric Leenders said “Whilst this is a small rise from a historically low base, anyone who thinks they may find it difficult to manage their finances should always contact their provider as soon as possible to discuss the support that’s available to help them. With most mortgage and personal loan holders, as well as businesses and credit card customers paying a fixed rate, many will see no change while their current deal lasts.”
“Given that lenders offering variable rates assess a customer’s ability to pay at much higher interest rates, most should be able to cope with any increases as they filter down. Lenders consider a number of factors when deciding how to respond to a change in the base rate, and in this competitive environment where it’s easy to switch providers, customers who are thinking about borrowing money should shop around to take advantage of the best deals on offer.”
“Savers will welcome a rate rise, although the effects may not be felt immediately because banks will be looking to balance the increased cost of customer borrowing with the savings returns they offer.”
In response to the decision, Gillian Guy, Chief Executive at Citizens Advice said “The interest rate rise risks compounding the problems of people already in financial difficulty. While many people won’t be affected by the change immediately, those who are struggling to pay existing debts or are relying on credit to pay their bills could see their debts increase.”
“With consumer borrowing still rising, now is the time to ban credit card companies from making unsolicited credit increases, burying people deeper in debt.”
Commenting on the impact on mortgages June Deasy, Head of Mortgage Policy at UK Finance said “The majority of borrowers will be protected from any immediate effects of today’s small increase because they have a fixed-rate mortgage. Over the last year, two thirds of first-time buyers have opted to fix their rate for up to two years, with a further one in four opting to fix for two to five years.
“Given that variable rate lenders assess the ability of applicants to pay at much higher interest rates, most should be able to cope with any increases as they filter down.
“Rates remain very low by historical standards and borrowers remain well placed to get a good deal from the UK’s increasingly competitive mortgage market. Anyone with concerns about managing their mortgage should contact their lender as soon as possible to discuss the advice and support available.”
Angus Dent, CEO, ArchOver said “This rate rise of 0.25% is largely symbolic. At the same time, it’s also a year too late. Dropping the interest rate below 0.5% was the wrong decision in the first place. The Bank should have pushed rates up to 0.75% as a show of strength that would have driven inflation down as the pound rose.
“Although this rise is unlikely to have any major material effects, it is a return to the trajectory we should have been on for the past year, and a good sign for a bolder policy.”
“For many, the move towards a higher interest rate will simply mean business as usual. Following the financial crash, there is a hunger to make up for ten lost years and UK savers and investors are finally waking up to the realisation that they need to chase higher returns. With interest rates remaining below 1%, this means looking for opportunities to branch out beyond traditional vehicles and introduce greater diversity into portfolios to secure a higher yield.”
Richard Carter, MD, Equiniti Credit Services commented “Now that interest rate rises have finally begun homeowners will become increasingly anxious to secure the best mortgage deals available. Lenders will be under growing pressure to pass the new rates on to their customers, but with 60% of homeowners on fixed-rate products, the majority won’t suffer the hikes just yet.”
“This gives smart lenders a window of opportunity. Agile technologies can quickly reduce operating costs enabling lenders to pass these savings onto consumers in the form of new lower-rate products. By bucking the trend for inflating rates, lenders can immediately stand out in a new market of increasingly uneasy homeowners, retaining existing customers and securing new ones.”
“Lenders that have been mulling automation and intelligent credit systems should act now – this is a golden opportunity to grow their businesses.”
Abe Smith, CEO & Founder of financial technology company Dealflo said “The 0.25% interest rate announced by the Bank of England may be modest and still sees interest rates at exceptionally low levels, but it changes the mood-music for lenders and consumers, many of whom will never have seen rates increase.” With the Bank of England signaling the potential for further rises, we expect to see lenders become more risk averse in their underwriting and consumers becoming more cautious in their spending plans. This is exactly what the Bank would hope to achieve.”
“The rate rise carries an inherent risk that people who find themselves over-committed financially may seek to mitigate their situation by pointing to poor sales practices and claims of mis-selling. In a motor market that is itself slowing, dealers and lenders need to look again at their agreement processes and technology, so that both lenders and customers are protected alike.”