CML and YouGov publish data on how borrowers will cope with higher rates
Published: 22 October 2014 | Author: Bernard Clarke
- Research carried out by YouGov in association with the CML shows that 60% of households with a mortgage expect their finances to remain broadly the same or actually improve when interest rates increase.
- The data shows that less than half of those currently in financial difficulty are struggling with their mortgage payments.
- Households show awareness of the prospects of rising interest rates. And the actions they may need to take when it does happen are reasonable.
The rise of interest rates is something borrowers and lenders are thinking about more and more. Despite the Bank of England chief economist Andrew Haldane’s recently expressed view that interest rates may remain lower for longer, no-one can really be sure of when they will start to go up – or how quickly they will rise.
Some consumer research carried out by YouGov in association with the CML looks at the possible impact of rising rates on mortgage holders. The research was from YouGov’s survey of changing interest rates on mortgage holders, carried out between 22 and 26 August this year. There was a base of 2,314 respondents, and data was weighted to make sure the results are representative of UK demographics.
The research presents a picture that is more complicated than we sometimes believe and offers some insights into how mortgage holders might respond to higher interest rates.
When asked about the overall state of their finances, the YouGov results show 34% of respondents say they are either financially healthy or financially very healthy, while 46% say they are neither in trouble nor financially healthy. Just under 20% are experiencing some financial difficulty, with 17% of respondents saying they are in slight financial difficulty and 2% in serious financial difficulty.
The survey also illustrates how other factors, such as unsecured debt, higher living costs or a big life event are often the cause of financial difficulty (shown below).
Chart One: Key factors affecting mortgage affordability
Looking to the future
Part of the rationale for this survey is to find out what households expect when interest rates go up and how they are going to react.
Unlike some other recent surveys, we find that households seem to have a reasonable idea of likely interest rates rises in the future and also appear reasonably aware of how this will feed through to their own mortgage rate.
It should not come as a surprise that mortgage borrowers on average see their finances being squeezed over the next three years by increasing interest rates.
Although a clear majority of respondents expect their financial situation to be healthy or at least broadly okay, 27% expect to be in some degree of financial difficulty – 21% say they will be in slight financial difficulty and 6% predict they will be in serious financial difficulty.
When we dig further, we see a lot of two-way movement below the surface as the impact of higher interest rates interacts with other envisaged changes in personal circumstances.
Table One: Current and expected financial situation of households
|Expected financial situation in three years' time|
|Serious difficulty||Slight difficulty||Neither in difficulty nor healthy||Healthy||Very healthy||Subtotal|
|Current financial situation||Serious difficulty||1%||0%||0%||0%||0%||2%|
|Neither in difficulty nor healthy||2%||10%||27%||4%||0%||43%|
Some 60% of mortgage holders believe that they will be in the same situation or better financially in three years' time even though they expect interest rates to rise. Just under half of respondents broadly speaking expect no change in their financial situation. Of those that do expect a change, 11% actually expect an improvement even with the prospects of higher interest rates and 32% see a worsening.
Of those that expect to move into financial difficulty, our survey struggles to shine a light on specific characteristics which may make them stand out. Lenders face a similar challenge in trying to spot those at risk of moving into financial difficulty, which is perhaps why it is not surprising that they are looking at ways to identify ‘at risk’ households on their books.
The survey suggests that households show a lot of awareness of how they might afford their mortgage payments, as well as different coping strategies available to them.
Chart Two shows some of the actions households say they are willing to take. There is a broad spectrum of coping strategies, ranging from straightforward actions such as cutting back on non-essentials that may be available to most households, to much more serious measures such as downsizing property.
Chart Two: Expected actions to continue affording mortgage repayments
By looking at how households expect their financial situation to change in three years’ time compared to now, we can draw out some useful insights.
Those who expect their situation to get better and be financially healthy naturally say they won’t need to do much to continue paying their mortgage or, if they think they need to, the most common response is to cut back on non-essential spending, so perhaps eating out less or taking fewer holidays.
Households which expect their situation to become worse, but still remain out of difficulty are similar to those who expect to be financially healthy, as they also say they would cut back on non-essential spending. They are also more likely to try and boost their income by getting a better paid job or asking for a pay rise.
Moving onto households which see their financial situation becoming worse and to be in slight financial trouble, almost 70% say they may cut back on non-essential spending and 40% say they may also cut back on essential spending such as food and clothing. These households are also the group most likely to try and remortgage to a better deal.
Finally, if we look at those who expect to move into serious difficulty (4% of respondents), their focus is much more on cutting back on essential spending and cancelling major spending plans as they are unlikely to have the ability to cut back non-essential spending.
Those who expect their situation to get worse and to be in some degree of difficulty over the next few years are willing to take more action and consider a broader range of actions. They are generally open to trying a combination of coping strategies, rather than just opt for one.
Although this may be a hypothetical situation, it shows households apparently have a well-grounded understanding of the plausibility of their coping strategies and are being realistic about their prospects.