INTEREST RATES TO RISE? TRUTH OR SCAREMONGERING?
Word on the streets of the financial district of London is that some City analysts have predicted that interest rates could rise in November 2017. However others argue that the Bank will maintain its reputation for talk, but not action. The Bank of England has hinted more than once in the last few months that UK interest rates are likely to rise “over the coming months” in order to curb inflation, preparing the ground for the first rise in the cost of borrowing in a decade.
While a rate hike would mean bigger returns on savers’ bank deposits, it would also mean higher repayment costs for many mortgage borrowers who are already feeling the pinch. An increase would also run the risk of choking off overall economic growth, at a time when activity is already weakening markedly because of uncertainty over Brexit and other economic headwinds.
The Office for National Statistics reported earlier this week the inflation hit 2.9 per cent in August: already higher than the peak the Bank of England had projected in its August Inflation Report. Inflation has mostly been driven upwards by the rising cost of imports, which in turn stems from the slump in sterling since the referendum. Some Economists have suggested that now is finally the time that the Bank takes a more hawkish turn, after eight and a half years of ultra-loose policy.
In contrast, some analysts have refuted this rumour suggesting that the Bank of England has managed to strengthen the pound without actually having to increase interest rates.
Whether this increase will happen, we are still unsure and the financial markets are now pricing a roughly 50% probability that rates will rise from their current record low, of 0.25%.
WHAT WOULD A RATE RISE MEAN FOR HOME OWNERS
It would mean higher monthly bills for millions of people with variable rate and base rate tracker mortgages.
If and when it happens, it would be the first rise in borrowing costs for a decade; ten years in which many mortgage holders have never seen their monthly repayments increase.
Those on fixed-rate mortgage deals would be protected from any increase, but only until the end of their deal’s fixed term. Problem being many are approaching the end of that term, therefore an increase in monthly outgoings becoming possibly unavoidable.
BUY TO LET INVESTORS
There are tens of thousands of BTL investors from right across the UK, and many of those who fall into this category will certainly be keeping their eye on any press releases coming out of the Bank of England in the next few months. Our own business has represented many people who fall into this category over the last seven years and an interest rate rise is not a development that would be welcome. The out-workings of this would mean that many could go into default with their payments, which could end up creating another bad debt book for many of the funders on the high street. It would not be unrealistic to suggest that overall, tens of thousands of individuals will be holding on by their fingertips if rates were to increase, particularly BTL investors.
HOW MUCH HIGHER
The cost of an interest hike will vary per household, depending on the terms of the mortgage, how long it is taken out for, and other factors.
The average UK standard variable mortgage rate (SVR) is 4.6%, according to financial data provider Money facts. Someone on that rate with a £200,000 outstanding mortgage balance and 25 years remaining would pay £28.72 a month extra (a payment of £1,151.77, up from £1,123.05) if the rate goes up by 0.25%, assuming it is on a repayment basis.
If there were a series of rate increases, and the rate was to go up by a total of one percentage point (ie, four lots of 0.25%), the extra cost would be £117.10 a month, or more than £1,400 a year.
WHAT SHOULD I DO?
It is imperative that individuals take measures now to plan ahead for a period that is likely to include a rise in interest rates. We would advise individuals to check their mortgage paperwork to determine and understand the agreements they have with their banks, and also the likely impact on their monthly income should rates rise. Too often too many people take the ostrich approach to these kinds of matters, which are far too serious to ignore as a potential impact of rate rises should you not be able to afford the mortgage payments meaning you may lose your property.
HOW CAN WE HELP?
Since 2010, GDP Equity Experts have helped 100’s of families and BTL property investors deal with property debt related issues. We are fully regulated by the FCA and have an incredible team who are here to help you today with any of the issues that might concern you with regards to this topic and other matters related to your debt position.
The clear trend over the last number of years is that those people who constantly review and have a very clear understanding of their monthly income levels and overall finances are better prepared and have much better outcomes when month to month costs increase for one reason or another.
If you have any queries in relation to anything in this piece or need some additional questions answered, our office would love to hear from you today.
In the meantime why don’t you click the link below and have a look at the most recent 7 step guide we have produced specifically for people who are living through a negative equity experience today.