Interest rate rise: what it means for households and businesses

With the Bank of England Monetary Policy Committee confirming its base rate will rise by 0.5% to 1.75%, households and business are going to see big jumps in their interest payments almost overnight.

Businesses will see £2bn added to their borrowing costs overnight

Analysis of Bank of England data by our team shows businesses have had an additional £2bn added to the costs of their bank debts. Businesses are currently paying £14bn annually in interest payments on their £409bn in floating rate bank debt. With the new 0.5% interest rate rise, payments on debt will increase to £16bn almost overnight.

We believe that the 0.5% jump in base rate is going to come as an unpleasant shock for businesses. Rising borrowing costs are likely to push even more businesses to close. In the past 12 months, 19,191 UK businesses have entered into an insolvency process, a 70% increase on the previous year.

The rates rise will be putting more businesses under financial strain, especially so-called ‘zombie’ businesses that survived the pandemic through the use of extremely cheap debt. As their debt repayments become more unsustainable, an increasing number of businesses are likely to enter insolvency.

Households facing £1.67bn increase in interest payment bills

The interest rate rise also means that UK households are currently paying £24.1 billion annually in interest payments on floating rate debt. With rates rising by 0.5%, annual interest payments will increase to £25.7bn straight away.

These debts include floating-rate mortgages, credit card debt, overdrafts, and other unsecured personal lending.

The majority of the rise in interest payments will be driven by floating rate mortgages. UK borrowers currently have £249.9 billion of floating-rate mortgages secured against their homes, at an average interest rate of 3.21%. The amount to be paid would be even higher were it not for a wave of borrowers switching from floating to fixed rate mortgages in recent months.

People have already been struggling with the burden of everyday costs of food, fuel and energy. Now they will see a jump in cost of their mortgages and other debt, adding to their worries.

Therefore we are likely going to see more personal insolvencies in the coming weeks and months as people simply become unable to service their debts alongside other rising costs.

*Source: Insolvency Service. Year end June 30 2022