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Homeowners are set to pay £750 more credit card interest next year

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Almost 13 million homeowners in the UK face paying an extra £750 in interest on credit and store card balances over the next year as a direct result of rising interest rates.

Analysis from specialist mortgage lender Pepper Money suggests 3.8 million homeowners are already feeling the pinch from rising interest payments, with their average credit card interest bill up more than £60 this year.

With interest rates set to rise further along with the cost of living, price of energy, food and fuel, Pepper Money calculates that banks, credit card companies and store card providers now stand to rake in an additional £2.8bn in interest payments made by those who own their home over the next 12 months.

This is just the extra interest charged on “revolving” credit including store cards, credit cards and overdrafts. Rising mortgage rates will also net banks higher repayments.

Why are interest rates rising?

The Bank of England has been steadily hiking the base rate in a desperate attempt to bring inflation, already over 10% and expected to hit at least 13%, under control.

At the start of December last year base rate was just 0.1%, its lowest ever level after an emergency cut in response to the pandemic.

In the first week of August the monetary policy committee at the Bank of England confirmed base rate would rise to 1.75%, the fifth hike so far this year and the sixth in the past 12 months.

Bank of England governor Andrew Bailey has indicated there will be a further two hikes later this year with markets now pricing in a base rate of 3% by early next year.

Lenders have been quick to pass on higher rates to customers. Moneyfacts data showed that between the start of March and the start of June, the average purchase credit card APR, which includes card fees, rose to a record high of 26.7%.

Anyone with credit card debt or paying interest on store card balances or overdrafts will be hit by higher costs, not just those who own their home.

The Money Charity calculates that the average UK household owes £2,192 in credit card debt alone.

At an APR of 26.7% interest payments come in at £585.26 a year just to keep the balance steady, never mind repaying the outstanding debt.

Laurence Morey, Pepper’s chief executive, said: “We know that with costs rising, the monthly commitment of servicing short-term debts such as credit cards, store cards and overdrafts, can stifle the ability of many families to meet their monthly outgoings.

“That’s particularly true when the cost of such credit is also increasing.”

Should you consolidate expensive debt?

Morey said in the “right circumstances” consolidating expensive short-term credit onto a longer-term loan at a lower rate can help to put families in greater control of their cash flows. Homeowners are particularly well placed to pay off debts by taking a larger mortgage when they refinance, he added.

Mortgage rates are far lower than the cost of servicing credit card and overdraft interest meaning that although the debt is still there, you’re paying your lender much less interest than you were being charged by your bank or credit card provider.

For example, NatWest currently has a 2-year fixed rate mortgage charging 3.19%. Although you’d have to pay a fee to remortgage onto this particular deal, the interest charged on that £2,192 credit card balance if you added it to your mortgage would be just £70 over the year – enabling you to pay more than the interest each month and reduce the debt over time.

Paula John, an independent mortgage specialist, said: “Debt consolidation may not be the right avenue for everyone, but there are many families that could benefit from taking steps to lower the interest rate they are paying on credit cards and overdrafts by refinancing onto a loan that is secured on their home over the longer term.

“In fact, by being proactive and taking control over their finances in this way, many people can actually boost their credit score.”

Moneyfacts finance expert Rachel Springall cautioned: “Anyone comparing deals, whether that be to consolidate debts with a loan or move their credit card balance to an interest-free deal, would be wise to check their credit score before they apply with Experian, Equifax or Totally Money.

“The months ahead are uncertain amid the rise in the cost of living but seeking advice from a debt advice charity is also wise should borrowers be struggling or fear they will be unable to keep up with their repayments.”

Before you make any decisions to take on a larger mortgage, it’s a good idea to speak to an independent financial adviser or mortgage broker who will able to help you understand the financial implications of consolidating debt this way.

Free and impartial debt advice is also available from debt charity StepChange, Citizens Advice and the Debt Advice Foundation.