The Bank of England has raised the base interest rate to 5%, the highest the UK has seen since the 2008 financial crash.
It was announced on Thursday 22nd June that the interest rate would rise from 4.5% to 5% at the start of July in an attempt to combat inflation.
Inflation is currently sitting at just below 9%, however, the Bank of England’s target is 2%.
This means that people with mortgages are likely to see an increase in their monthly payments.
Mortgages
There are currently approximately 13 million mortgage accounts active in the UK.
Those in fixed rate mortgage payments are likely to see a rise from an average of £700 per month to £1,000 per month. Approximately 800,000 households still need to refinance this year, and a further 1.6 million homeowners next year, meaning that they will face much higher repayments.
Variable-rate mortgage repayments are also set to rise from an average of £450 to over £700 a month, this applies to 1.5 million UK households.
Research by the National Institute of Economic and Social Research has estimated that the latest interest rate hike would see 1.2 million UK households run out of savings by the end of the year due to having to pay more for their mortgage.
Risk to Private Rent Sector
Around two thirds of existing landlords are reliant on a mortgage.
If a landlord’s mortgage is to substantially rise along with interest rates, then their tenants may be the ones expected to foot the bill. Landlords may choose to raise prices in-between tenants, meaning that new tenants may face much higher rent payments.
A consequence of this is that many current tenants feel trapped in their current properties with unaffordable rent prices. Affordable properties become more scarce since the market value for similar properties rises at the same time.
Risk of Falling into Debt
Around a third of adults currently paying rent or mortgage payments are finding it very or somewhat difficult to afford them.
The steep rise in monthly mortgage payments may result in an increase in households struggling with unaffordable debt.
It’s expected that many people who will struggle to keep up with the higher payments may turn to credit to fund everyday essentials.
Unfortunately, this cycle of debt can very quickly become unaffordable.
Accessing debt help in Scotland
For those struggling with debt, there are a number of solutions and ways to access financial help in Scotland.
A Trust Deed is a legally binding agreement between you and your creditors where you agree to pay back an affordable portion of what you owe, whilst protecting assets such as your house and car.
There is usually a fixed time rate of four years and on completion of this term, all remaining debt will be written off.
While in a Trust Deed, creditors can no longer contact you and cannot pursue you for the remaining balance that will be written off.
To qualify, you must have a suitable level of income and affordability and the amount of debt must be more than £5,000.
The Debt Arrangement Scheme (DAS) allows you to repay your debt at a manageable level for you, freezing all interest and fees.
To qualify you can have any amount of debt but must not be in any other form of debt repayment.
A DAS is also legally binding and the people you owe money to are not able to contact you or take action against you.
Payment breaks of up to six months due to unemployment or illness are also available while in the scheme.
The DAS will last until the debt is cleared but it will protect assets such as your home and cars.
The debt advice team at Trust Deed Scotland® can also give you the advantages and disadvantages of both solutions plus alternative formal Scottish debt solutions available for Scottish residents.
Call us on 0141 221 0999 for more information.