Fear Grow for Millions if Interest Rates Increase

by Mark Johnston

Millions of home owners could face a tough 2011 if interest rates rise in the coming months. Hundreds of thousands of borrowers are on standard variable rates or mortgage deals that could push their monthly repayments beyond a manageable amount if the Bank of England increases interest rates quickly.

Home owners who are only just managing to make ends meet because they are on such a low interest rate may find themselves in hot water if they are hit with quick rises in the base rate during 2011.

The impact is so much more severe as millions of additional customers have chosen to remain on their lenders standard variable rates as  they are working out a lot cheaper than other products that are being offered such as fixed term mortgages.

Around 8 million customers of the total 12 million mortgage holders are on some sort of variable rate who as a result of a interest rate change could see their repayments soar in the coming year. An increase in the Bank of England of just 0.5%, increasing the base rate to 1% would put around £43 per month on the average mortgage of £150,000.

The Bank of England have raised concerns that far too many households are exposed to rate increase. They are also worried that many borrowers are relying on the low interest rates instead of making provisions for future rises which will always come as the 0.5% cannot last for ever.

The possibility of a base rate increase together with a struggling house market which has seen the value of homes drop 14% in the last few years is a real worry for experts. As well as an inflation busting interest rate rise, they are also concerned about the long term impact of the up and coming VAT rises which will see the price of good increase due to the rate of VAT going from 17.5% to 20%. These factors will hit home owners hard as they struggling to come to terms with government spending cuts which are attributed to job losses and pay freezes.

Jonathan Loynes, chief economist at Capital Economics voiced his concern by saying “A relatively small increase in interest rates could have a fairly sizeable impact on the housing market at a time when the market is already pretty weak,”

Although anyone not yet on a fixed rate deal would feel the pinch of an interest rate increase, the worst effected would be those who are over stretched at the moment and are struggling with repayments even with rates at 0.5%.

Fixed rate mortgage have come down a lot in the last few months, with the right level of equity a borrower should expect to pay around 3.5% which is roughly the same amount as a tracker mortgage at the moment.

David Hollingworth, of mortgage broker London & County, said: “People got complacent and started to feel that it was normal for rates to be so low. All that can happen is that interest rates will increase.”

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