Interest rate rises will spell disaster for millions
How Rising Interest Rates Could Impact Borrowers
In recent news, borrowers have been granted a temporary reprieve as the Bank of England decided to hold off on increasing the Bank Rate. However, with inflation predicted to reach 5 percent next year, it’s becoming increasingly clear that the era of record-low interest rates at 0.1 percent may not last much longer. Mortgage rates have already started creeping up in anticipation of a rate hike to 0.25 percent, which means borrowing costs are on the rise, regardless of what policymakers decide. So, the crucial question consumers should be asking themselves isn’t when interest rates will go up, but rather how they will cope with the inevitable changes.
The Inevitable Rise in Borrowing Costs
Debt repayments are poised to increase as banks pass on higher costs to their customers. To make matters worse, households are already grappling with skyrocketing energy bills and the ever-increasing cost of living. According to the OECD, the international economic forum, Britons are among the most indebted people in the developed world, with household debt reaching a staggering 145 percent of disposable income. When interest rates rise, millions of households will witness their expenses soar, and this is a burden many cannot afford to bear.
A YouGov survey has shown that 65 percent of Britons wouldn’t be able to accommodate a £100 increase in their monthly bills – and this includes middle-class households. Even those earning between £60,000 and £70,000 are not immune, with two in five of them expected to struggle. Astonishingly, even for those earning £100,000 or more, a third admitted they would face financial difficulties if their monthly outgoings were to rise significantly.
Anticipated Rate Hikes
Rate hikes are on the horizon, possibly in the new year or even just before Christmas. Even minor increases can have a substantial impact on costs. For example, a homeowner with a 20 percent deposit purchasing an average house valued at £264,000 would currently pay around £845 a month with an interest rate of 1.5 percent. However, if that rate were to increase to 2.5 percent, the monthly bill would jump to £947 – a £100 tipping point that could be financially straining for many.
A False Sense of Security
The past decade of low interest rates has lulled many into a false sense of security. While house prices have surged, cheap mortgages have kept the cost of homeownership relatively low. However, borrowers are now facing a reckoning. Mortgage costs are set to rise instantly for those nearing the end of their fixed-term deals or already on variable rate agreements. While older homeowners may remember the high interest rates of the late 1980s and early 1990s, today’s borrowers face a different challenge. Property prices are considerably higher, and borrowing costs have also surged, creating an almost insurmountable obstacle for prospective homeowners.
High House Prices and Stagnant Growth
Analysts predict that house prices will remain high, but growth will stagnate. This poses a significant problem for recent homebuyers who previously benefited from rising property values and the opportunity to remortgage to a cheaper rate. Unfortunately, this won’t be the case anymore.
The Potential for a Housing Crisis
The impact of rising interest rates could be devastating. A report by consultancy Capital Economics has warned that the number of homes being repossessed could double if the Bank Rate reaches 0.5 percent. This week’s decision to freeze rates was merely a temporary respite. Borrowers need to brace themselves, as the road ahead is likely to be a bumpy one.
As interest rates inch higher and borrowing costs follow suit, borrowers find themselves at a crossroads. The era of cheap credit is coming to an end, and households need to prepare for the financial challenges that lie ahead. While the full extent of the impact remains uncertain, it’s clear that the days of low mortgage rates are numbered, and prudent financial planning is essential to navigate this impending storm.