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Brits “vulnerable” to interest rate rise

By Martin Fagan - news@consumerchoices.co.uk

As household income falls, an interest rate rise could cost families an additional £3bn a year, says think tank.

At a time of rising prices and falling wages, families already struggling to make ends meet could be dealt a further financial blow if interest rates rise and mortgage payments increase, according to the latest research from a respected economic “think tank”.

Millions of households are vulnerable to a rate rise, said the National Institute of Economic and Social Research (NIESR), Britain's longest established independent economic research institute. Just a 0.5% rise in interest rates would knock 0.35% off real income growth next year.

According to NIESR’s quarterly research, an increase in the Bank Rate to 1% from 0.5% would cost households another £3billion and a rise to 1.5% would cost Brits an extra £6billion.

As the Office of National Statistics (ONS) revealed the average UK household income stood at £29,000, a 1% increase in interest rates would add £210 a year to household expenditure on top of any rise in monthly mortgage repayments.

For example, a £150,000 repayment mortgage at 5% increasing to 6% would add £90.95 a month or £1,091.40 a year.

“After two years of decline, any interest rate rise would put a dangerous dent in disposable incomes,” said NIESR economist, Simon Kirby.

“In real terms, household incomes continue to fall and remain vulnerable to even a modest rise in interest rates.”

The think tank said household incomes are continuing to fall in real terms and that wage growth has failed to keep up with an elevated rate of inflation and tax increases.

Households will continue to feel the squeeze this year, it added, with real disposable incomes due to fall by 1.1% - around £9billion.