UK households would be hit by an immediate increase in payments of £976m if interest rates were to rise by just 0.25%, according to audit, tax and advisory firm Mazars.
Analysis of Bank of England data found that UK households are currently paying £17.2bn annually in floating rate interest payments that are likely to be affected immediately by an rate rise, including on variable-rate mortgages, credit card debt and other personal lending.
At present, the Bank of England’s base rate is 0.1%. If rates rose by just 0.25%, these annual payments would increase to £18.2bn.
BoE keeps base rate at 0.1%
If interest rates were to rise by 0.5%, household payments would leap by a further £1bn to £19.2bn.
Interest payments would rise further still, to £21.1bn – almost £4bn above current levels – should a there be a rate increase of 1%.
The majority of the rise in interest payments would be driven by floating rate mortgages.
UK borrowers currently have £325bn of floating rate mortgages secured against their homes, at an average interest rate of 2.29%.
While the Bank of England has been focused on keeping the cost of borrowing low during the pandemic, this may have to change should inflation continue to rise.
Inflation stood at 2.4% in July 2021, having been at less than 1% for most of 2020 as lockdowns stunted economic growth.
The bank expects inflation to peak at 3% this year. However, any further rises could force interest rates to rise further and faster than currently planned.
Earlier this month, the Bank of England’s outgoing chief economist, Andy Haldane, warned that inflation could reach almost 4% this year, potentially forcing the Bank to perform a ‘handbrake turn’ and raise interest rates.
Paul Rouse, partner at Mazars, said: “While the Bank of England is unlikely to raise interest rates in the short term, if inflation continues on its current course, there could be no option but to do so.
“UK households need to be aware of the potential consequences of interest rate rises on their finances, should inflation force a change of course from the Bank.”
Rouse added: “Many UK households are in a vulnerable position when it comes to debt.
“While unlikely to happen immediately, a small interest rate rise could make a big difference to monthly budgets, potentially leaving some in difficulties.”