Homeowners do not understand impact of increasing interest rates

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by Kay Murchie

According to the recent Personal Credit Index survey from CreditExpert.co.uk, the online credit report monitoring service from Experian, mortgage holders are clueless when it comes to the financial impact of increasing interest rates.

The survey said that 70% of homeowners miscalculate and misunderstand what effect rising rates will have on their monthly repayments.

Out of those questioned, 70% of Britons answered incorrectly when asked what impact a 0.5% interest rate increase would have on monthly payments for a £100,000 interest-only mortgage.

Nearly 20% answered £80 and 17% said payments would increase by no more than £10. In fact, the correct answer is £40.

Furthermore, the survey established that 77% of mortgage holders did not know what annual percentage rate (APR) was. 44% said it is the interest rate of a loan and a further 15% thought it was the amount of a loan paid back in a year. APR is actually the interest rate and cost of any loan.

However, the lack of knowledge about the effect of increasing interest rates and APRs has helped consumer credit confidence to rise 2 points in the last quarter to 98. This is still below the high point so far of 100 in April 2007.

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 recent survey also established that the amount of people with credit or loans who say they are comfortable with their borrowings has increased in the last quarter from 74% to 76%.

People in the North are losing confidence according to the survey whereas confidence is rising in London.

A spokesperson for CreditExpert.co.uk said it is worrying that people misunderstand the effect of changes in the interest rate. It is crucial that people are aware of changes so they can make the best possible decisions and choices.