UNUM Work:Life UK badge

Work:Life UK: Feeling low about interest rates?

According to a recent ICM survey, people's finances are so tight, an interest-rate rise of just a few percentage points would see many struggle to keep a roof over their heads. So, what can be done to ease the pressure on our finances?
Woman looking at bills and receipts on floor
According to some experts, the solution to easing pressure on people's finances has to be radical. Photograph: David Sacks/Getty Images

Higher taxes with VAT at 20%, rising food and fuel prices, fears of an ongoing recession and inflation that's been above the Bank of England's target of 2% for 36 out of the past 41 months all mean one thing: employees' incomes are suffering.

Fortunately, a record 30-month run of interest rates being held at a low 0.5% has brought homeowners some much-needed breathing space to their mortgage repayments. Since 2008 homeowners have seen their repayments fall by as much as 39% (equivalent to paying 3.69% interest compared to 5.82% three years ago), according to the Halifax.

However, the ICM survey of 5,000 UK employees, commissioned by the Guardian on behalf of income protection provider Unum, indicates that there are serious problems waiting around the corner. Despite the low cost of borrowing, an interest-rate rise of just a few percentage points would mean 7% of respondents would not be able to cover their mortgage repayments. A one percentage point rise would mean 17% would have to cut spending on everyday basics, such as food and clothing.

"We've all been steered to aspiring to own property," says John Evans, CEO of group-buying website Incahoot. "For the past few years, people haven't overstretched themselves on their houses like they have in the past, but what has happened is that everyday purchases have continued to rise. In combination, people are now at a tipping point. Bills are up by £1,000 to £2,000 a year on average. If mortgages go up by the same amount, lots of people are going to be in serious trouble."

It's due to fixed outgoings continuing to become more expensive that is really draining people's salaries; even low interest rates might not avert potential penury for some. According to the Council of Mortgage Lenders (CML), three million borrowers risk being pushed into financial difficulty if or when rates do rise by just a few percentage points. This puts added pressure on people's monthly incomes: since many outgoings are fixed costs, it is not always as simple as cutting back on spending.

The need to have a financial back-up plan in place is borne out by the fact that the number of people losing their homes has already started to rise. In August the CML revealed that repossessions had increased by 15% in the first quarter of 2011 – to a total of 9,100. It blames rising fixed prices eroding people's ability to keep on top of their repayments.

According to some experts, the solution to easing pressure on people's finances has to be radical. "The best way to view this is to instead say we've been given an economic lifeline," says David Kuo, former BBC economics presenter and columnist at Motley Fool's website, fool.co.uk. "It's likely rates are going to stay at their current rate till possibly 2013. Although it sounds counterintuitive, now should really be the time when people actively try to reduce debt before they drown in more debt when rates do rise."

Kuo accepts it's not a popular move, especially when income is being squeezed so hard. But he argues people have to take a short-term hit on their lifestyles now, for a financially stress-free life in the longer term. "Money can be a source of worry for people," he says, "but you can take steps to avoid the worry and stress that money problems cause. It's like getting inoculated: you take the pain of the needle now to avoid a much less pleasant disease."

Inflation is predicted to carry on rising – but not indefinitely. "Inflation normally comes from an overheating economy, and we've hardly got that," says Evans. "It will come down." In the meantime, Kuo warns workers "mustn't waste this [low interest rate] lifeline. Don't waste this opportunity now because you'll be in a worse position later."

About this project


    Commissioning editor: Peter Crush
    Contact: David Fisher 020-3353 4658


Today in pictures