The Cost of Interest Rate Rises

During his annual Mansion House speech last week the Governor of the Bank of England Mark Carney dropped heavy and thinly disguised hints that interest rates could be set to rise this year. Most market commentators, taking their lead from budget projections put forward by the central Bank, predicted rates would begin to rise early next year, with February being considered the most likely month.

Speaking at the black tie event on June 12, Mr Carney said:

“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.”

In discussing what would be the first adjustment to the base rate of 0.5% since 2009, he went on to add that:

“the MPC [Monetary Policy Committee] has no pre-set course. The ultimate decision will be data-driven.”

The Bank has previously said that interest rate rises would not be considered until certain specific criteria, including a move toward solid and balanced recovery not heavily reliant on housing and an end to the real-term reductions in wages, were met.

Having recently been speaking more and more on the signs of economic recovery visible within the UK, it would seem Mr Carney now believes the time is right to increase the base rate of interest, though for many he has been prompted to do so in order to put the brakes on the housing market, rather than because the Bank’s preconditions have been fulfilled.

He said:

“The increase in house prices in the past year means we can expect the proportion of high loan-to-income mortgages to grow further in the coming year even if the housing market begins to slow.

“This is concerning because a durable expansion requires mortgages to be serviceable over their lifetime not just when interest rates are at record lows.”

A rise in interest rates would not only hamper the demand which is currently driving house price inflation, it would also act as impediment to those seeking to remortgage. It seems that the Bank of England policy makers are willing to sacrifice some financially overstretched borrowers in order to prevent the type of housing bubble that could threaten the economic recovery as a whole. Those home owners with minimal financial wiggle room who find themselves with nowhere to go once rates rise will be considered collateral damage in the quest to rebalance the economy toward trade and development.

The IMF recently predicted the UK economy to grow by almost 3% of GDP over the course of the next year. This potential level of growth is higher than that predicted for any other western nation. Yet it is when interest rate rises kick in that the economic recovery will really be tested. While certain sections of the economy tend to thrive during periods when interest rates are low, particularly consumer sectors based on large purchases, like cars and houses, which people tend to invest in when the base rates low. The problem is, it is often difficult to ascertain the extent to which upturns in these sectors are symptoms of wider economic stability and how much is little more than cheap debt.

Though Mr Carney was quick to reassure investors that any interest rate rises would be gradual, most economists have predicted a jump from the current level of 0.5% to around 2.25% within the next three years.

This is excellent news for savers, who have suffered during the record setting, prolonged period of low level rates imposed to encourage investment following the financial crisis. However, rate rises would be less welcomed by many mortgagors and house buyers. Though interest rate rises signify an inevitable return to something akin to financially normality, and the fact that the Bank only intends to raise the base rate to half of what has always been considered the norm shows that they realise the financial crisis bit deep into the economy; many questions remain over whether the upturn the economy is currently experiencing can survive any increases, particularly given the fact that current household debt stands at 140% of disposable income. Concern pervades over whether this debt is serviceable. Should interest rate rises expose further inadequacies in the economic upturn, such as the fact that it is heavily constructed on cheap debt, could spell disaster for many households when the base rate rises.

At present, in Britain, 2.88 million people in the country are living in fuel poverty and one million working people are visiting food banks. These are just two of the symptoms of the cost of living crisis, about which Labour’s two Eds – Milliband and Balls – have been waxing lyrical in the past few years. Combined with the fact that 1 in 10 new mortgages taken out in the past year have a loan-to-income ratio of 4.5, these circumstances are creating an understandable sense of unrest across much of the country.

If you have concerns over impending interest rate rises, or if you find yourself unable to cope and pushed into dire financial circumstances following their inevitable increase, quick house sale companies such as National Homebuyers remain an option for you.

We buy your house directly from you, with no third party investors and, therefore, without the stress that can often arise as a consequence of being part of a long and complicated property chain. While companies that buy houses directly from you – of which National Homebuyers are the market leaders – may not be the right option for everyone in every circumstance, it is definitely worth bearing in mind that, should the storm clouds gather around you when interest rates rise, there are professional, reputable organisations available to help.