Increasing interest rates by 1% would cost UK individuals an extra £7.6bn in borrowing costs in the next year, according to research from Moore Stephens’ restructuring and Insolvency team.
Bank of England governor Mark Carney has suggested the new ‘normal’ interest rate could increase from 0.5% to 2.5% in the medium term and that the Bank of England is preparing for interest rate rises.
Even if interest rates increased by just 0.25% over the next year (to 0.75%), then extra borrowing costs for individuals would total £1.9bn. Immediate costs would be far higher if consumers had not already switched to longer term, fixed rate mortgages.
Moore Stephens says interest rates are currently at such low levels that even a small rise of 0.5% would cause an average 17% rise in interest costs to borrowers on floating rate mortgages.
Rising interest rates by 1% would also have a huge impact on UK businesses, with an extra £2.1 billion in borrowing costs in the next year.
Moore Stephens says that even without the increase in interest rates, the economic recovery could still heighten the risk of insolvency for some businesses because companies often deplete their accumulated cash reserves during the recession and so become more dependent on raising finance to provide working capital during the recovery.
Also better trading conditions may make creditors more bullish and willing to crystallise their losses by calling in outstanding debts.
Michael Finch, partner in Moore Stephens’ restructuring and insolvency team, said: “The economy is definitely improving, but interest rates rises could threaten the recovery. We need to ensure that the increase in interest rates is the equivalent of taking away the punchbowl, not turning off the oxygen.
“Companies need to be realistic and start budgeting for a higher cost of debt now so that they are not caught out when interest rates do go up.
“Businesses that think their solvency might be put at risk by higher interest rates would be well advised to work with independent professional advisers to look at ways their business could be restructured to survive.”