A rise in interest rates will result in monthly repayment shocks for millions of homeowners who are already living on a tight budget, according to figures from free debt advice provider PayPlan.

PayPlan has launched an interest rate calculator this week to help clients find out how a potential mortgage rate rise might affect them. This follows a national survey conducted by them which found that 65 per cent of people* living in their own mortgaged property felt that a rate rise would have a ‘severe impact’ on their finances, with 72 per cent saying they could not cope with a £100 increase in their monthly payment.

With 40 per cent of people not having experienced a rate change since 2007, almost a quarter said they were “extremely worried” about potential rate increases. Making matters worse, over 90 per cent of people concerned have not spoken to their lender about their worries, indicating a clear reluctance to prepare for any changes in their financial circumstances.

Peter Munro of PayPlan commented: “There is a real opportunity here for the debt advice sector and lenders to work together to help those many borrowers who are vulnerable to repayment increases to plan ahead and minimise any shocks. A joined up approach between lenders and advice providers could encourage consumer engagement and preventative activity. Those surveyed had an average mortgage balance of £103,000, requiring a monthly repayment figure of £625. This shows that while many of us can manage a six-figure mortgage on current rates it wouldn’t take much to make life difficult. Only 6 per cent described themselves as not worried at all about a rate increase.” 

“We are keen to hear from partners who would like to share our calculator with their clients to help them seek debt advice sooner. A quarter of those clients surveyed described themselves as “extremely worried” about rate rises. Our research shows that there is a real concern about rate rises but there is little dialogue between lenders and borrowers about it. Customers are used to low rates and little or no increases and this means sacrifices will have to be made to cope with repayment increases.”

When asked what mechanisms they could apply to help cope with mortgage repayment increases, the results showed:

·                54 per cent would have to cut back on essential living costs.

·                8 per cent would have to seek additional work.

·                20 per cent would have to reduce other debt payments.

·                Only 6 per cent considered switching mortgage a solution.

·                The most popular ‘other’ answer was to “sell up”.

The kind of support people said they would like included help arranging fixed rates; being told the cost of changing to a repayment mortgage; being offered part payment-part interest arrangements; and seeing exactly what a 1 per cent rate increase would mean on a £100,000 mortgage monthly repayment.