Millions of homeowners could be hit with an annual increase in interest cost payments on their unsecured loans
British homeowners are likely to spend an additional £1.6 billion in interest payments on unsecured loans in the next 12 months due to recent interest rate increases.
According to research commissioned by specialist mortgage lender Pepper Money, 7.7 million homeowners could be hit with an annual increase in interest cost payments of more than £900 on their unsecured loans, including car loans.
The research conducted by YouGov also found that of these homeowners that have at least one unsecured loan, 15% have already seen the interest rate charged on their loans increase in the last six months.
In early August, the Bank of England increased the base rate for the sixth consecutive time since mid-December 2021. The rate fell to a historic low of 0.1% in response to the COVID-19 pandemic in March 2020, but last December’s 0.15% hike was followed by four consecutive 0.25% increases before the latest 0.5% raise.
It was expected that UK lenders were going to hike mortgage prices in quick response to the BoE’s decision to raise rates.
Read more: How the UK interest rate rise will impact mortgages.
“The spiralling cost-of-living is putting the squeeze on everyone’s finances as the price of essentials like food and fuel continues to rise,” Paula John, an independent mortgage specialist, said. “The situation is exacerbated as interest rate rises mean that the cost of borrowing has also increased.
“So, those customers with outstanding credit, such as unsecured loans, could also see their payments increase. Some unsecured loans are fixed rates, but many have a variable rate that can rise in line with interest rate increases. This means that the cost of paying the interest also rises, putting further pressure on their finances.”
Read more: Mortgage Introducer’s Interest Rates database.
Laurence Morey, chief executive at Pepper Money, said that the monthly commitment of servicing short-term debts such as personal loans can put extra pressure on family finances if the cost of servicing those loans is increasing.
“In these circumstances, consolidating those debts by refinancing onto a homeowner loan at a lower rate could potentially put families in greater control of their finances, enabling them to pay down that credit over the longer term,” Morey pointed out. “Debt consolidation may not be the right avenue for everyone, but there are many families that could benefit from taking a proactive approach to managing their monthly spend on interest payments.
“Analysis of our own lending at Pepper Money shows that debt consolidation loans are being made to normal people, with higher-than-average incomes, who are just looking to restructure their finances. Often, these people have run up large balances over a long period of time, and debt consolidation provides them an opportunity to take greater control over their monthly interest payments.”
