New figures from The Money Charity have revealed that, while Brits tend to have a high level of debt, they're paying less in interest than at any time since 2003, thanks to record low interest rates and growing competition. The question is, will it last, and if not, can Brits' credit commitments be comfortably maintained?
The figures show that Brits spent, on average, £1,001 each last year on debt interest repayments, equating to 3.79% of average earnings and adding up to a whopping £50bn across the country. However, while this sounds like a lot, The Money Charity says that it's actually the lowest figure seen since 2003, and that although debt has grown to a record 12-month average of almost £1.5trn, today's low interest rates mean we're actually paying less for it than before the financial crisis.
The charity's analysis went on to reveal that, in November 2016, people were paying an average mortgage interest rate of 2.68%, average credit card interest of 10.21%, and 6.7% on other loans. In comparison, in April 2008 – when the base rate was set at 5.0% – average mortgage rates were more than double that at 5.8%, credit cards stood at 12.16%, and loans had interest of 8.39%.
This means that, even though borrowers owed over £110bn less in 2008 than they do now, they were paying far more interest, totalling some £86bn – 65% more than the £52bn paid in 2016. The fact that we're borrowing more now but paying less means concerns are rising about how long this pattern can be maintained, particularly with talk of an interest rate rise in the months ahead – if interest rates were higher on current levels of debt, could people still afford the repayments?
After all, if rates hadn't changed since 2008, we'd be paying 81% more in interest than we do today: £94bn in total, or £1,810 per person per year, equating to 7% of average earnings. The report points out that a base rate of 5% isn't historically high, either, so that while our debts may feel manageable now, if we have to spend one in every £14 we earn simply paying lenders interest, it could be a whole lot harder.
"We know that near-zero Bank of England rates are not normal, and soon the bigger debt could well mean bigger repayments too!" said Michelle Highman, chief Executive of The Money Charity.
"It's likely things are going to change and it won't be as easy to make payments on your mortgage or loans. But remember that there's help available at an early stage if you're in difficulty. If your debt feels too much to deal with, there's free, impartial advice available from organisations like StepChange and National Debtline."
If you're concerned about your level of debt and want to do something about it before rates start to rise, now's the time to take action. You could switch your credit card debts to a 0% balance transfer credit card, for example, giving you plenty of time to pay off the balance without needing to worry about interest. Or, if you've got bigger debts, why not consolidate with a low-cost personal loan? Rates are at record lows, so now could be a great time to take advantage.
If you regularly dip into your overdraft, make sure you've got an account that comes with a low overdraft rate. Then it's time to think about your mortgage, particularly if you're nearing the end of a fixed term or are already on your lender's standard variable rate (SVR): mortgage rates may be at record lows, but there are signs that this won't last, so if you want to be confident you'll be able to beat any rate rise, it's time to lock into a new fixed rate!
Check out the top mortgage deals to see what's available – you may want to think about a longer-term deal for years of repayment security – and that way you can be sure your repayments won't rise anytime soon, no matter what happens to the market at large.
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