Almost 13 million homeowners in the UK will have to pay an additional £750 in interest on credit and store card balances over the next year as a direct result of the interest rate hike.
Analysis from specialist mortgage lender Pepper Money suggests that 3.8million homeowners are already feeling the pinch of rising interest payments, with their average credit card interest bill rising by more than £60 this year.
While interest rates are expected to rise further with the cost of living, the price of energy, food and fuel, Pepper Money calculates that banks, credit card companies and credit card providers store are now set to reap a further £2.8billion in interest payments made by those who will own their homes over the next 12 months.
This is only the additional interest charged on “revolving” credit, including store cards, credit cards and overdrafts. Rising mortgage rates will also lead to a net increase in bank repayments.
Why are interest rates rising?
The Bank of England has been steadily raising the key rate in a desperate attempt to control inflation, which is already above double digits and is expected to reach at least 13%.
In early December last year, the base rate was just 0.1%, its lowest level ever after an emergency cut in response to the pandemic.
In the first week of August, the Bank of England’s Monetary Policy Committee confirmed that the base rate would rise to 1.75%, the fifth hike so far this year and the sixth in the past few months. last 12 months.
Bank of England Governor Andrew Bailey has indicated there will be two more hikes later this year, with markets now pegging a base rate of 3% at the start of next year.
Lenders were quick to pass on the higher rates to customers. Moneyfacts data showed that between early March and early June, the average credit card purchase APR, which includes card fees, hit an all-time high of 26.7%.
Anyone who has credit card debt or pays interest on store card balances or overdrafts will be hit with higher costs, not just those who own their homes.
The Money Charity calculates that the average UK household alone owes £2,192 in credit card debt.
At an APR of 26.7%, interest payments amount to £585.26 a year, just to keep the balance stable, let alone paying down outstanding debt.
Laurence Morey, Pepper’s Managing Director, said, “We know that with rising costs, the monthly commitment to pay off short-term debt such as credit cards, store cards and overdrafts can stifle ability of many families to meet their monthly expenses.
“That’s especially true when the cost of that credit also goes up.”
Should you consolidate expensive debt?
Morey said that under the “right circumstances,” consolidating expensive short-term credit into a longer-term loan at a lower rate can help families better control their cash flow. Homeowners are uniquely positioned to pay off their debts by taking out a larger mortgage when they refinance, he added.
Mortgage rates are well below the cost of servicing credit cards and overdraft interest, which means that even if the debt is still there, you are paying your lender much less interest than charged by your bank or your credit card provider.
For example, NatWest currently has a 2-year fixed rate mortgage at 3.19%. Although you would have to pay a fee to remortgage on this particular offer, the interest charged on that £2,192 credit card balance if you added it to your mortgage would only be £70 over the year – allowing you to pay more than the interest each month and reduce the debt over time.
Paula John, Independent Mortgage Specialist, said: “Debt consolidation may not be the right path for everyone, but many families could benefit from measures to reduce the interest rate that they pay off credit cards and overdrafts by refinancing on a loan that is secured on their longer-term home.
“In fact, by being proactive and taking control of their finances in this way, many people can actually increase their credit score.”
Moneyfacts finance expert Rachel Springall warned: “Anyone comparing offers, whether consolidating debt with a loan or transferring their credit card balance to an interest-free offer, would be advised to check their credit score before applying to Experian, Equifax or Totally Money.
“The coming months are uncertain amid the rising cost of living, but seeking advice from a debt counseling charity is also a good idea if borrowers are struggling or worried they won’t be able to keep up with their repayments. “
Before making the decision to take out a larger mortgage, it is advisable to speak to an independent financial adviser or mortgage broker who can help you understand the financial implications of consolidating debt this way.