The Bank of England looks to take more drastic measures to combat the bite of inflation, but by raising interest rates, which makes holding and paying off debt more expensive, millions of individuals are feeling mounting pressure on their household budgets.
The end of low-interest rates
During the pandemic, ultra-low interest rates were a recurring theme, welcomed by many consumers of debt, such as mortgages and other loans. The Bank of England base rate was already at a low 0.75% when Covid took hold. The rate was then reduced again, first to 0.1% in March 2020 and then to 0.25%, the lowest it has ever been in the more than 300-year history of the Bank of England.
However, fast forward to today and we’re faced with the deep and direct “shock” on the UK’s national income as a result of global demand/supply issues caused in part by Russia’s invasion of Ukraine (the other part being Brexit), as well as a severe halt of gas exports to Europe which has had dramatic effects on energy bills and relative prices in the UK.
And of course, let us not forget the political and economic damage that the ‘mini-budget’ had on the mortgage market on 23rd September 2022.
In a bid to combat these price rises, the Bank of England’s monetary policy response was to further raise interest rates on 3 November 2022 to 3% from 2.25%.
Interest rates are at their highest level since 2008 as a result of this increase, which is the biggest one-time increase in 33 years.
The Impact on UK mortgage holders
Variable Mortgages
The biggest impact of rising interest rates will be on the 2.2 million people in the UK who are either on a tracker or discounted-rate deal (SVR). Increasing the base rate of interest means that many of these people will see an immediate increase in their monthly payments which are set against this base rate. According to UK Finance, a leading organisation for the banking and financial sector, the average rise for tracker mortgages will be around £73 per month and around £46 per month for standard variable rate (SVR) mortgages.
Fixed Mortgages
The other proportion of people on fixed deals, roughly 6.3m UK mortgages (three-quarters of the total), won’t be adversely affected right away, but those with fixed deals coming to an end in the next three to six months may want to lock in a new rate now to protect you from the expectations that the base rate could hit 4.25% next year.
New Home Buyers
For those looking to buy a home or refinance their mortgage, any new deals will now cost more too because lenders are anticipating rising rates and pricing them accordingly. Due to the rise in price that followed the mini-budget market turbulence, those looking for new fixed-rate deals are looking at roughly 6% for two and five-year deals.
The average new two-year fixed-rate mortgage jumped from 4.74% in September to 6.65% by October – however, rates have cooled slightly in recent weeks.
What about people who are already in difficulty?
According to the most recent UK Finance data, the overall number of customers with mortgage arrears decreased over the three months leading up to the end of June. However, in contrast to the previous quarter, there were 5% more homes with mortgages that were repossessed.
The coming years will be challenging, no doubt. The debt collection industry is in a good position to deal with impending changes to insolvency laws as well as debt relief programmes like the Statutory Debt Repayment Plans.
Debt collection and debt recovery agencies should continue to adapt their expertise and consumer credit infrastructure, helping consumers resolve difficult debts while demonstrating the importance of their services in preserving credit and managing long-term debt.
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