Almost 8million homeowners are expected to see their interest payments on personal loans and car loans rise by an average of £900 over the next year.
Analysis by specialty mortgage lender Pepper Money found that 7.7 million homeowners currently have at least one unsecured loan, many of which are car financing.
Of these, 15% have already seen the interest rate charged on loans rise in the past six months, with the average extra interest costing more than £900 a year. Over the next 12 months, that means UK homeowners could spend an additional £1.6billion on interest payments on unsecured loans.
Why are interest rates rising?
The Bank of England has been steadily raising the policy rate in a desperate attempt to control inflation, which is already above 10% and is expected to reach at least 13%.
At the start of December last year, the base rate was just 0.1%, its lowest level on record 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 rate on a £7,500 loan stood at 5.2%, the highest in six years.
Average unsecured personal loan rates of £5,000 over three years, £7,500 over five years and £10,000 over five years were all up from early March 2022.
The cost of higher loan rates
Anyone who pays off car financing or a personal loan will be hit with higher costs, not just those who own their homes.
According to The Money Charity, the average adult in the UK currently has £3,823 in unsecured debt. Based on a lending rate of 5.2%, annual interest charges currently stand at £199.
Independent mortgage specialist Paula John said: ‘The spiraling cost of living is putting a strain on everyone’s finances as the price of essentials like food and fuel continue to rise.
“The situation is exacerbated because rising interest rates mean that the cost of borrowing has also increased. Customers with outstanding credit, including unsecured loans, could also see their payments increase.
While some personal loans and car finance are agreed on a fixed interest rate for the term, many have a variable rate that can increase with increases in interest rates.
John said: “This means the cost of paying interest is also rising, which puts additional pressure on finances.”
Should you consolidate expensive debt?
Laurence Morey, Pepper’s Managing Director, said, “We know the monthly commitment to repay short-term debt such as personal loans can put additional pressure on family finances if the cost of servicing these loans increases.
“In these circumstances, consolidating these debts by refinancing them on a homeowner’s loan at a lower rate could potentially give families greater control over their finances, allowing them to repay this credit over a longer term.”
Debt consolidation may not be the right path for everyone, but Morey said that under the “right circumstances”, consolidating expensive short-term credit into a longer-term loan to a lower rate can help families better control their cash flow. Homeowners are in a unique position to pay off their debts by taking out a bigger mortgage when they refinance, he added.
Mortgage rates tend to be lower than the cost of servicing personal loans and car financing, which means that even if the debt is still there, you pay your lender much less interest than what your bank or your credit card provider.
For example, NatWest currently has a two-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 this average outstanding loan of £3,823, if you added it to your mortgage, would only be £122 over the year – allowing you to pay more than the interest each month and reduce the debt over time.
Moneyfacts finance expert Rachel Springall cautioned: “Anyone comparing offers, whether to consolidate debt with a loan or move their credit card balance to an interest-free offer, would be wise to check their credit score with Experian, Equifax or Totally Money before. they apply.
“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 in this way.
Free, unbiased debt advice is also available from debt charity StepChange, Citizens Advice and the Debt Advice Foundation.