Money Advice Service research reveals three out of four homeowners haven’t considered how a 3% interest rate increase would affect their mortgage repayments.
This is despite the Bank of England Governor Mark Carney estimating interest rates will rise by 2% to 3% over the next three years.
Rate rises may be gradual
It’s likely any increases in interest rates will be gradual and spread out over the next few years.
Our research shows 47% of people would find it hard to cover an increase of up to £150 extra a month.
And almost one in five (19%) said they would really struggle to cover any rise in interest rates in their monthly repayments
Too many will leave it too late
More than half of the 3,007 people surveyed said they would change life habits, such as cutting back on spending and on trips to the cinema, pub or restaurant, when interest rates start rising.
Around one in three said they’d dip into savings or start to budget as soon as an interest rate rise is announced.
Worryingly, 5% said they’d use their credit card to cover the higher repayments, while 2% would resort to a payday loan.
Using credit or loans to cover mortgage repayments is not a good idea because they too will be affected by interest rate rises. Likewise, planning to budget once an announcement is made could be leaving things a little too late.
Take action now
Most people aren’t prepared for an interest rate rise, with only 44% of people surveyed saying they have a plan in place to cope with increases. Yet, there are several things that can be done now to help soften the blow of any rate increases, as our guide Interest rates: What homeowners can do now to beat the rise shows.
Don’t get caught out by unexpected costs
Nick Hill, a money expert at the Money Advice Service said: "Mortgage holders need to be more mindful of the fact that a rise in interest rates is inevitable – even for those on a fixed rate, as their deal will come to an end sooner or later. Those who purchased their first property in the last five years will have only ever known historically low interest rates, but less than ten years ago the interest rate set by the Bank of England was 5% higher than today.
"The smallest increase in mortgage repayments can make a significant impact on a family budget – especially for those people who are already financially stretched. So it’s a good idea to review your personal finances, start looking at where you can cut back, and plan ahead now."