Smart Data Foundry uncovers impact of changing interest rates

New research conducted by Edinburgh’s Smart Data Foundry has shed light on the significant impact of bank rate rises on consumer finances in Scotland. The study, which utilised anonymised current account data from NatWest Group, focused on 15,000 mortgage holders and 1,500 renters to uncover the unequal effects of shifting interest rates.

The findings, outlined in The impact of Bank Rate rises on consumer finances in Scotland, highlighted the direct consequences of interest rate fluctuations on mortgage repayments. The research revealed that while mortgage rates remained stable from 2019 to 2022, they subsequently escalated by an average of 20% from early 2022 to July 2024.

In contrast, renters experienced minimal changes in their average housing costs throughout the same period, potentially due to the existence of the rent cap imposed by the Scottish Government. The report indicated that mortgage holders witnessed a three-point increase in housing costs as a percentage of income, with average four-week mortgage expenses spiking from approximately £650 to £790. On the other hand, renters’ costs remained stagnant at around 11% of income or roughly £280.

Of particular concern were the implications for mortgage holders with low incomes (below £20,600 annually). Not only did these individuals allocate a more substantial portion of their income towards housing costs, but this percentage also escalated by nine points, from 32% to 41% of income, equating to around £370 to £470 over the specified period.

Moreover, the data highlighted the constrained discretionary spending power of low-income mortgage holders amidst and post the COVID-19 pandemic. Dr Nathan Bourne, the lead researcher at Smart Data Foundry, emphasised the significance of examining the impacts on various societal segments and tracking these effects in near real-time.

In the words of Dr Bourne, “This research provides valuable insights into how changes in rates impact different sections of society. By quantifying the magnitude of the impact and observing it on a weekly basis, we can also analyse the variations across regions and demographic groups.”

Dame Julia Unwin, the chair of Smart Data Foundry, echoed Dr Bourne’s sentiments, underscoring the disproportionate burden placed on low-income households in the face of escalating costs. She highlighted the potential of financial data to inform policymakers and facilitate targeted interventions during the prevailing cost-of-living crisis.

As Dame Unwin aptly summarised, “While we have all grappled with rising interest rates, escalating energy prices, and inflation, it is the most vulnerable members of our society who bear the brunt. Even a marginal increase in costs can have profound repercussions, from children going to bed hungry to families struggling to afford basic necessities. It is imperative that research insights like these prompt policymakers to take decisive action.”