Mortgage holders clueless on impact of rising interest rates

The financial impact of rising interest rates on mortgage payments is miscalculated and misunderstood by almost three quarters (70 per cent) of British mortgage holders according to the latest Personal Credit Index survey from CreditExpert.co.uk, the online credit report monitoring service from Experian.

When asked what effect a 0.5 per cent interest rate rise would have on monthly payments for a £100,000 interest-only mortgage, seven in ten (70 per cent) of Brits answered incorrectly. The correct answer is a £40 increase but almost a fifth (19 per cent) thought outlays would rise £80 or more and 17 per cent said they would increase to no more than £10.

The latest Personal Credit Index also reveals that almost eight in ten (77 per cent) of mortgage holders do not know what annual percentage rate, or APR, is, with 44 per cent thinking it is only the interest rate of a loan and a sixth (15 per cent) stating it is the amount of a loan paid back in a year. The correct definition of APR is the interest rate and cost of any loan.

Lack of knowledge about the impact of rising interest rates and APRs may have helped consumer credit confidence to rise two points in the last quarter to 98 – though this is still below the high point so far of 100 in April 2007. The rise in confidence could also be partly attributed to summer holiday bills having now been paid off, while Christmas spending is still to come, resulting in Brits feeling more financially secure.

The Index, which is based on survey data from Ipsos MORI in October 2007, tracks consumers’ current credit confidence and future expectations on a quarterly basis. The latest survey also reveals:

The percentage of people with credit or loans who say they are comfortable with their borrowings has modestly risen in the last quarter from 74 to 76 per cent

More than half (53 per cent) of all adults are comfortable with their level of borrowing, a two point increase from the last Index

Northerners losing confidence

The North has seen a drop in financial confidence. Following an increase from 97 to 100 between April and July 07, the Index has dropped back to return to 97. This may be the result of the sub-prime market crash in September, which had a greater effect in the North than other regions.

Confidence has risen in the rest of the country, most notably in London. Despite the Capital’s confidence falling to an all-time low of 89 in July, in the last quarter it jumped back seven points to 96.

In the Midlands, confidence rose five points from 100 to 105, while the South saw its Index rise from 89 to 96. These increases could be attributed to a borrowing slowdown; just 13 per cent of Brits stated their borrowing had increased in the last six months, compared to 16 per cent in the last quarter.

The year in retrospect and future predictions

Consumer confidence in September last year was the lowest since the Index was formed in January 2006, at just 95, but things are looking brighter a year on. Despite the impact of the sub-prime collapse and increased speculation that the UK is on the brink of a credit crunch, consumer confidence has risen to 98 – a three point increase since last year. However, the expected financial strain of Christmas and a change to the Base Rate might make the Index drop in the next quarter.

“Although the current Personal Credit Index shows that people generally are more confident than in the last quarter, the lack of understanding of key terms and the effect of interest rate changes is worrying. It’s important for people to be familiar with standard financial terms and stay on top of changes that affect their personal finances so they can make the best possible decisions and choices,” says Jim Hodgkins, Managing Director of CreditExpert.co.uk.

“An online credit report monitoring service such as CreditExpert helps you do just that. As well as providing you with a summary of your credit status and alerting you to any changes in your credit report, it also contains a full glossary of financial terminology and lots of good financial tips and calculators. You can get a free 30 day free trial at www.creditexpert.co.uk.”