It has been widely publicised recently in the British media that the Bank of England is likely to increase interest rates at the beginning of 2016. This is due to continued growth and strength within the UK economy, with overall GDP around the pre-recession levels.
What does this mean for you and I?
Due to the high levels of debt apparent within the UK this article views the rate rise from the predictive of a mortgage holder. Given the steady rise in house prices and relatively recent times it may be fair to assume that a large number of people are mortgage holders rather 100% equity homeowners. This is certainly more accurate for the younger workers who have fairly recently stepped onto the property ladder.
Having said that we do acknowledge that there may be a gain for savers from an increase in interest rates, provided that this increase is passed in into savings products offered by the banks.
Impact on mortgage holders.
Let’s take the example of an individual with a repayment mortgage of £100,000 over a 25 year period. With a current interest rate of 3% represents will be £474 a month. If the base interest rate was to increase by 0.5% and the interest rate payable on the mortgage increases alongside this to 3.5%, the new monthly repayment amount would be £501. This increase doesn’t seem too bad on face value and £27 a month is likely to be absorbed by a typical mortgage holder’s
However, let’s consider an increase of 1.5% which takes the new mortgage rate to 4.5%. Here the monthly repayments would increase to £556, which is an increase of £82 or 17%. That is a reasonably significant increase and a mortgage holder who can only just afford the mortgage at the original rate of 3% may well struggle to meet this increase in repayments. This is what the media refer to as the time-bomb.
Our view is that some people may experience difficulties but on the whole most people are likely to manage with an interest rate increase better than what the media portrays. Some of this simply feels like headline grabbing!