What Rising Interest Rates Mean for You
On Thursday, Mark Carney, Governor of the Bank of England, announced that the Bank of England base rate will likely rise to 2.5% from 0.5% over the next three years. This rate is the rate which other banks and building societies base their own borrowing rates on.
For savers, this is good news, as those with savings accounts could see higher returns, but what about borrowers? In short, borrowers could be faced with higher repayments as the interest rates rise. People with credit card or other unsecured debts will face higher monthly bills. The estimated 2.5% rise only reflects the base line rate that could be set by the Bank of England over the next three years. Other banks and building societies may set higher rates, but we don't know yet what these rates will look like. Clearly, these changes could have a significant impact on borrowers who are already struggling to pay their bills, and the change in interest rates will affect homeowners too.
Although the number of people taking out new fixed-rate mortgages has now grown to 77% of all new UK lending, most people with existing mortgages borrowed with a variable (sometimes called floating) interest rate. What this means is that mortgage repayments fluctuate according to the current interest rates set by the banks. 57% of current mortgage balances in the UK are tied to a floating rate, so a rise in interest rates will change repayment amounts for thes mortgages.
For example, a rise from 0.5% to 2.5% can increase the amount of interest outstanding by a high margin. When applied to a large mortgage balance, the corresponding increase in interest payable could be devastating to homeowners. A mortgage balance of £100,000 at a 0.5% interest rate would see a total interest amount of £500. The same balance at a rate of 2.5% interest would total £2,500.
What should borrowers do? The number one thing to do is to get a plan in place to prepare for potential increases in mortgage or credit card interest rates. This means evaluating your personal financial situation and exploring all your options.
In our experience of helping people with negative equity and other consumer debts, we here at GDP Partnership know that education about your options is the best way to tackle potential problems before they get out of control, and if you're reading this, you've already taken the first step!
If you have debts of any kind, being proactive is the best way to feel empowered and take control of your debts, rather than letting them control your life. As interest rates rise, making the environment more difficult for borrowers, it will become more important than ever to make sure you have a viable plan to prepare for the future.
If you have any questions about your financial situation, feel free to contact us for professional, confidential advice