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How are Interest Changes in the UK Affecting Disposable Income?

Interest changes in the UK are affecting the amount of disposable income that households have. As interest rates increase, goods and services become more expensive meaning that households have less disposable income available.

This has in turn meant that more people are needing to borrow money online (source: Doddler.co.uk) in the form of both secured and unsecured loans in order to tide themselves over and cover their ongoing household bills and costs. This increase in personal and household debt is indicative of the squeeze of people’s finances.

What are interest rate changes?

Interest changes refer to changes in interest rate, the amount that lenders charge borrowers for the service of borrowing money. Interest rates are calculated as a percentage of the total amount of the loan. For example, when you repay a mortgage, you pay back the principal amount (the total value borrowed) as well as interest (which could be fixed or variable). Interest rate will be influenced by multiple factors and can also change depending on the state of the economy.

How do you calculate interest rate?

Interest rates usually depend on a benchmark set by the country’s central bank. Lenders will then look to this benchmark in order to set interest rates and fees for their loans. This is at the discretion of the lender but they will generally be trying to balance market competition with profit. When inflation rates are high, as they currently are, banks tend to increase interest rates as a way of regulating economic growth.

How are interest rates changing?

The UK is currently experiencing a period of high inflation, with some of the highest inflation rates in years. In April 2022, inflation hit 7.25%, over three times the target rate of 2%. In response, the Bank of England raised UK interest rates from 0.25% to 0.5%. This action was the first back-to-back rate rise that Britain has seen since 2004. Many policymakers wanted a further increase to 0.75% to compensate for the inflationary pressures being felt.

How does interest rate affect disposable income?

Higher interest rates mean that it is more expensive to borrow and that disposable income is reduced. As a result, the growth in consumer spending is limited.

In 2021, the situation for disposable income was generally good, with median household disposable income in the UK at £31,400 in the financial year ending 2021. This was during the first year of the coronavirus pandemic and was largely influenced by low interest rates and low inflation. In April 2022, however, consumer disposable income confidence fell to a record low.

Cost of Living Crisis

UK households are currently undergoing the worst cost of living crisis in decades, with the cost of general expenses increasing considerably. Households are being hit with higher costs of everything from utilities to food costs to fuel. The lower-impact households are being hit the hardest.

The Bank of England has already warned that disposable incomes will continue to fall in 2022 and 2023 as monthly expenses become increasingly costly, leaving little money behind. Rising inflation and tax is also impacting UK households and leaving them with yet less disposable income.

Despite the rising cost of living, salaries are not increasing at a rate which matches. For example, the Bank of England has predicted that real post-tax labour income is at its worst level in over 30 years – they expect the post-tax labour income to shrink by 2% in 2022 and by a further 0.5% in 2023.

Are mortgages impacted by rising interest rates?

When interest rates increase, mortgages become more expensive as a result. This means that consumers end up paying more for their mortgage overall and it is less affordable for them to purchase property.

For mortgage providers, rising interest rates may also not be cause for celebration. Although you could argue that in times where interest rates are higher, mortgage providers could make a greater profit, it also means that borrowers might be less willing to borrow money. This means that mortgage providers need to strike a balance between what is affordable for consumers and what is profitable for them.

What is happening around the world?

In most countries across the globe, there is some form of crisis with regards to inflation and people’s disposable income. This has come about as a result of increased demand in economies after the Covid pandemic and subsequent lockdowns as well as the recent war in Ukraine. In the USA for example, Google searches for loan-related queries like ‘online payday loans Texas’ and ‘get money now’ have seen large increases, indicating people’s need to find money to get them through each month.

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Written by Marcus Richards

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