While a 0.25% rise would only put rates back to where they were just over a year ago after the referendum, we have a generation of borrowers and savers that have never experienced a rate rise. Although governor Mark Carney has frequently said any rises will be small and gradual, it is still likely to be a shock to many to see interest rates rise.
From a lender perspective, there is encouragement from both the regulator and trade bodies to ensure proactive engagement and strategies with borrowers when interest rates increase. The number of high risk or vulnerable borrowers is estimated to be in the tens of thousands.
This is a mix of people on low incomes or those who are still in high loan-to-value situations on variable rate mortgages or about to come to the end of a fixed rate.
Unsecured debt
Around 4.2m borrowers will come to the end of their fixed-rate deal either this year or next according to UK Finance, so are therefore likely to be affected by rising rates.
Also at risk are those who have increased personal debts. In fact, one of the biggest concerns now is around rising unsecured debt levels.
Any rise in rates, while necessary, could cause a payment shock for some people, typically the most vulnerable who are already struggling to make ends meet.
Lenders will therefore be considering their strategies in identifying their most vulnerable borrowers in a rising rate environment. Portfolio scoring and trending via analytical tools, now widely available, will be useful in assisting in this process.
Proactive campaigns encouraging those that are worried about their finances to make contact will also have a positive effect both in terms of identifying borrowers at risk, and if done properly, by positive PR through undertaking the task in a borrower-centric way.
Borrower hardship strategies
However, the element of unsecured loans is an unknown at this time, in so far as while it is widely assumed that people would prioritise their mortgage payments this may actually not be the case. If people are using unsecured debt to live day-to-day, it may actually be this debt they prioritise when funds get short.
Lenders need to prepare not just in terms of borrower hardship strategies and potentially higher arrears.
The reality of rate rises in the UK is that they will be very gradual, and maybe not as frequent as originally thought.
The actual effect on the pounds in our pocket may be minimal for some, but one of the biggest effects may be in confidence – the confidence to spend, for businesses to invest and for people to buy new houses.
This may have the knock-on effect of reducing mortgage transactions for a while until people get used to the new normal.
