8m have never seen an interest rate rise: this spells disaster

Latin descent man and woman struggle to pay their monthly bills.  They are calculating expenses versus budget income and are ups

Eight million Brits have never seen an interest rate rise in their adult lives, and could be underestimating the danger it represents.

It's now ten years since the rate last rose, reaching 5.75% just before the global economy crashed.

And anybody that's taken out a mortgage since has seen their payments either remain the same or falling. As a result, with house prices rocketing, many buyers have been taking out the biggest mortgage they can afford.

"It's been a decade since the last interest rate rise, so it's little wonder that borrowers have got used to the idea of cheap money," says Laith Khalaf, senior analyst with investment firm Hargreaves Lansdown.

"The typical mortgage rate has fallen from 5.8% in July 2007 to 2.6% today, helping to support household incomes and the housing market in the wake of the financial crisis."

However, the Bank of England is now believed to be considering a rate rise, on the grounds that it would help to curb consumer borrowing.

"Markets are now pricing in a 55% chance of a rate rise by the end of the year," says Khalaf.

"However, the large amount of consumer debt means that even when the Bank of England does finally decide to wean the UK off low interest rates, it will be a very slow and steady process."

The chances are that an initial rise would only take the rate up to 0.5%.

See also: Are interest rates about to rise? What does it mean for you?

See also: The best UK five-year fixed-rate mortgages 2017

So what can you do?

Anybody that's taken out a mortgage in the last couple of years will have been put through a lengthy interrogation aimed at establishing whether or not they could cope if their payments rose.

If this is you, you may have to tighten your belt a bit, but you should be fine.

Otherwise, you might want to consider taking out a fixed-rate mortgage: it will cost you more to start with, but will at least give you peace of mind that your payments won't go up for the term of the deal.

Before making a decision, you can check out exactly how much your monthly payments will increase for any given rate rise by checking an online calculator.

You'll need to know your total mortgage amount, its duration, whether it's interest-only or repayment, and your current rate. There's an easy-to-use calculator from Experian here.

Most common causes of debt
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Most common causes of debt

There are some very common reasons for building up problem debts. Here we reveal seven of the most common, and what you can do if you face them.

Unemployment or illness that means one or more of the household’s earners are unable to work will bring a profound change in family finances, and according to the Money Advice Service is the most common reason for getting into problem debt.

If your circumstances change, therefore, you need to immediately address your family finances, and put everything on a minimum spend lockdown. You should also look into the benefits and tax credits that are available sooner rather than later, to try to close the gap.

If you are on the kind of contract that means varying hours, it can be incredibly difficult to work out what you can afford to spend - making it the second most common reason for getting into debt - according to the Debt Support Trust.

Rather than swinging through the extremes from week to week, the best approach is to establish a budget that will work in the leanest of months, so you don't find yourself getting used to the months when you work more hours.

According to Citizens Advice, trying to service too much debt is the third most common reason for getting into difficulties. The TUC found that those with problem debts spend 40% of their income on debt repayments.

If you are in this position, you officially need some help with your debt problems. If you continue to rob Peter to pay Paul, you will end up owing more and more, so you need to take stock and talk to a debt charity about all your options.

The double-whammy of the legal bills combined with the incredible cost of establishing two separate households is enough to make divorce or separation the fourth most common reason for going into debt - according to the Debt Support Trust.

There's no easy solution, but if you are going through this, it can be helpful to talk through your financial situation with someone you trust or a debt charity, who can help you balance a stretched budget.

Problem debts aren’t necessarily caused by a sudden shock to the system. According to the Money Advice Service, 20% of their clients are simply trying to live on an unsustainably low income.

If you are in this category, it’s important to seek help on the benefits and tax credits you may be able to receive. It’s not always easy to navigate the system, but charities like StepChange have experts on the benefits system who can talk you through what’s available.

The combination of rising costs and stagnating wages over the last few years has meant increasingly people saw their monthly wage cover less and less of their monthly outgoings. This position has started to ease more recently, but has left many people far worse off than before the financial crisis. The Money Advice Trust said a combination of this and unexpected costs was responsible for almost one in ten problem debts.

If you consistently spend more than you are expecting, it's well worth keeping a spending diary. That way you can establish the real cost of living, and start to identify where you can cut costs.

The Money Advice Service says it commonly deals with individuals who have struggled to get to grips with budgeting and debts, and have got into debt because they don’t have the skills and knowledge to manage their money effectively.


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