UK adults who own their home are less vulnerable to financial shocks than those in other countries, according to HSBC.

Financial resilience

The UK has the second lowest number of people who would struggle to cope if mortgage interest rates increased by 2%; worldwide, 22% of people would face instability should interest rates rise, in Britain, it is just 16%.

Even a 5% rate rise would only negatively affect 35% of the UK’s homeowners, compared to almost half (47%) of the global population.

Big spenders, bad savers

The study also shows that, on average, UK mortgage holders spend 34% of their monthly income on repayments, 4% below the global average. However, despite the tendency to spend large amounts on housing, many people looking to buy a house will struggle to save a large enough deposit. Globally, 80% of prospective homebuyers find saving a deposit to be difficult, compared to 84% of people getting ready to buy in the UK.

Despite this, current UK homeowners take an average of just four years to accumulate their deposit. While the worldwide average is a year longer, and French buyers spend around seven years saving.

One of the reasons behind the length of time people spend saving is growing deposit aspirations; 69% are planning to put a 20% deposit down. The main source of this money is regular savings at 78%.

So, whilst buying a house in the UK might be tough, it is comparably easier than in many other countries.

How interest rate rises affect homeowners

Tracie Pearce, HSBC UK’s Head of Retail Products says:

“Interest rates have been at historic lows for many years, and many people who got onto the property ladder in the last decade have never experienced anything else. In fact, the recent increase in the UK’s Bank of England Base Rate would be the first time they have seen one.

“Many home owners are heading into uncharted territory having entered the housing market with record low mortgage rates. They may have taken out a fixed rate that is due to come to an end or are on a Tracker rate and will possibly see their rate creep up over time.

“While it is positive to see UK homeowners’ resilience and confidence in their finances, it’s important they are conscious of potential interest rate rises and how they might affect household budgets.”

Your home maybe repossessed if you do not keep up repayment on your mortgage.

Preparing for a financial shock

The research shows that 41% of people are willing to stretch themselves financially to buy a better home. Consequently, leaving a larger safety net in place is sensible, because without it, the smallest financial shock could leave you in danger of:

• Being unable to make mortgage payments and potentially losing your home
• Falling behind on essential costs, such as household bills
• Falling into debt and negatively impacting your credit score
• Needing to borrow from friends and family to make ends meet

There are two forms of financial protection which can make riding out an income shock, or interest rate rise much more manageable:

1. An emergency fund

Emergency funds can be used for all kinds of financial trouble, from a broken-down car, to home repairs, or even to cover the costs of medical equipment after an accident.

Put simply, an emergency fund is money which can be used if your income cannot cover an essential expense. It is recommended that this fund is equal to three-to-six months of living costs just in case your household unexpectedly loses an income.

This will also provide a buffer if your interest rates rise more sharply than expected.

2. Insurance

The purpose of insurance is to pay out when something goes wrong. It is something that you never want to need, but you always need to have. There are three types of insurance to consider, which will protect you and yours from the financial implications of ill health or death:

• Life Insurance: Pays out a lump sum if you die of an illness which is covered within the terms of the policy
• Critical Illness Cover: Pays a lump sum or income upon diagnosis of a serious illness
• Income Protection: Replaces a portion of your income if you are unable to work due to illness or injury

Life Assurance plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.

Definitions of critical illnesses or income protection vary between providers.

The importance of financial planning

Taking financial advice and having a clear plan of action surrounding your finances can keep you financially confident and stable, no matter what trouble you may face. A good financial plan will include safeguards to protect you and your family, should the unexpected become reality.

To talk about the best ways to reinforce your family’s financial stability, get in touch.