With virtually no safety margin in the average household budget, a further rise in interest rates could tip many homeowners over the edge, according to a study by personal finance website Fool.co.uk.
Currently, the gross income of the average household in the UK is £32,800. This equates to a net income of £26,700 after adjusting for the receipt of benefits and the deduction of direct and indirect taxes. While this comfortably exceeds average household expenditure of £20,800 (2) before mortgage payments, it only tells part of the story.
The single largest item of expenditure for most households is mortgage payments. At around £6,600 a year, mortgage payments account for almost a quarter of total household expenses in the average UK home. As the average outstanding mortgage is £95,900 , this would suggest that, on the whole, homeowners may still be benefiting from historically low interest rates fixed at around 4.8 per cent.
However, after deducting total outgoings from total income, the average household does not have any slack in its budget. In fact, there is a small shortfall of around £50 a month.
Over the short-term this is manageable. But with typical standard variable rates of 7.5 per cent , homeowners could face a hefty shortfall of around £1,900 a year when their fixed-rate mortgage deals expire. Furthermore, around 15 million households on below-average income may be disproportionately affected.
David Kuo, head of personal finance at Fool.co.uk, said: “The signs are not good for overstretched homeowners, and by implication the housing market. With almost no contingency left in their budgets, another rate rise, even a small one, could see many homeowners struggling to meet higher mortgage costs.
“Homeowners need to act swiftly. It is vital that they revisit their budgets now and identify where savings can be made. The average household may need to cut annual outgoings by as much as a tenth when their current fixed-rate deals expire.
“It can be argued that statistics can prove anything you want, or as the man with his head in a fridge and his feet in the oven once said: ‘On average I feel quite comfortable.’ But burying your head in the sand is not a sensible option. Homeowners need to take active steps now.”
