Britain’s economy is one of the fastest growing in the developed world. Apparently. It certainly doesn’t feel like it. So the Governor of the Bank of England casually advocated last week that because things are so good, interest rates could go up from their current 0.5% to 3% by 2017, bringing them back to “normal” levels. That’s a massive 6 fold hike! How will you be affected?
If you’re a homeowner on a fixed rate mortgage, you won’t see any difference in your mortgage repayments until your deal expires. Your repayments would only increase if interest rates had increased at the time of expiry of your current deal. If however you’re on a variable rate or tracker, your monthly repayments would most likely increase in line with a rate hike.
Industry calculations suggest that an increase of 2.5 percentage points on a £150,000 repayment mortgage would push up monthly payments by around £230 per month. For interest-only mortgages, the rise would be even steeper. The cost of servicing an interest-only loan that tracks the Bank rate plus 1 per cent would jump from £188 a month to about £500 a month. This is bad news for many landlords who typically take out interest only mortgages on buy-to-let property.
What you should do: Anyone with a short-term fixed rate, tracker or variable mortgage is vulnerable. Your best move would be to speak to a mortgage adviser to work out how you may be affected if interest rates were to rise. Long term fixed rate mortgages have become very popular indeed and it’s easy to see why.
If you’re a tenant you may be under the illusion that you won’t be affected by interest rates rises. Don’t be fooled. The increase in mortgage cost may be passed onto you if your landlord‘s mortgage repayments were to increase.
What you should do: Never underestimate your powers as a tenant. Your landlord relies on your rent and many landlords would consider fixing your rent for a fixed term – typically 2 years at a time, to prevent the upheaval and cost of finding a new tenant. Ask the question. You may be surprised by the answer.
If you’re a saver then this should be good news, right? Not necessarily, because whereas lenders are trigger-happy in passing on interest rate hikes to borrowers, the Banks are infuriatingly slow in passing on interest rises to savers. There is also a big dilemma for savers in that they can get a far better rate by tying up their money for several years – around 3% per cent for a five-year fixed rate account versus half that for a variable account. But if the Bank rate rises, that 3% would begin to feel like poor value.
What you should do: You may want to hold off before deciding on a long term fixed rate savings deal. This is because the price of these fixed deals is affected by future expectations of interest rates. If the economic recovery gathers more velocity, the fixed rate best buys will rise.
The fact that our economy is growing again is certainly something to be pleased about. Whether or not the squeeze to come is a price worth paying is another matter completely. Be prepared! Speak to your Sterling & Law Independent Financial Adviser.
Akwasi Duodu, Sterling & Law Group plc.