Some 13% of people use their overdraft to cover the cost of their rental or mortgage payments – the equivalent of 1.2 million people, according to new research by comparethemarket.com.
Of these, one fifth – 20% – use their overdraft to cover the full payment amount, while almost a quarter – 24% – use it to cover, on average, half of the cost, the research found.
Rents are rising at their fastest pace for three years, with the average rental price nationally standing at £886 per month.
Given that the average mortgage payment is £680 per month, according to the ONS, when it comes to paying monthly bills, overdrafts can be a very expensive way to manage debt due to fixed daily or monthly charges, as well as fees for having an overdraft facility in place.
From 6 April 2020, new FCA rules mean these charges will be scrapped and banks must charge a simple annual interest rate for overdrafts, without additional fees and charges. This move is designed to make overdrafts simpler, fairer, easier to manage as well as easier to compare between current account providers.
In response to the regulatory changes, a growing number of high street banks have announced a flat fee of 39.9% on all overdraft fees.
John Crossley, head of money at comparethemarket.com, said: “During the course of life we will all have rainy day moments when we’ll need to use emergency funds. On these occasions, people need pots of money to dip into – a savings nest egg. Relying on overdrafts to fund regular bills, including mortgage or rental payments, can be a costly way of managing household finances.
“With the rise in overdraft fees, there are other solutions available to pay off debt in a responsible way. Borrowers should ensure they only borrow what they can repay and use a soft eligibility checker to prevent damaging their credit score. Anybody struggling to make repayments should contact their provider in the first instance.”
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