Interest Rates On The Rise?

by Mark Johnston

The bank of England has signalled that families should prepare for a rise, after 2 year of historic low cost borrowing; interest rates are on the way back.

Higher borrowing costs could be a major problem for home owners who have been lulled into believing that their monthly mortgage repayments would stay low for years.

Two thirds of home owners have a variable rate mortgage, meaning 8 million households would pay more when interest rates rise. A rate rise of just 1% would increase monthly repayments on an average £150,000 variable rate mortgage by£43 a month or £516 a year.

On top of the rate rise warning the bank of England paints a bleak picture of soaring inflation, rising energy bills and sluggish economic growth.

This comes as household gas bills are set to jump up to an average of £100 and electricity bills by £50 in the next 9 months.

Una Farrell from the debt adviser’s consumer credit counselling service said “I am concerned that mounting pressure on family budgets will force many to choose between heating their houses and putting food on the table”.

The Council of Mortgage Lenders (CML) has predicted that once the base rate does rise the number of repossessions could rise to approximately 45,000 in 2012. 

Quarterly inflation reports reveal that the ‘squeeze’ on household’s incomes is currently the worst in 80 years and is expected to continue for longer than previously predicted.

By the start of August 2011 experts were predicting early 2013 for the first increase to happen but now following the massive stock market turbulence and government debt fears experts now suggest the first rise will be late 2014.

Mervyn King the governor of the bank of England hopes he could keep interest rates low, helping the economy to expand despite the big public spending cuts and tax rises. However a surge in commodity and energy prices means that the very credibility of the bank of England as an inflation fighting force is at stake.

Once the bank of England starts to raise interest rates some analysts believe they could rise to 2%bringing an end to the long honeymoon enjoyed by most borrowers. The concern for the government is if the bank moves too quickly the already fragile recovery could be brought to a shuddering halt.

However as long as the bank of England decision to raise interest rates is well signalled it may be possible to do so with out damaging consumer confidence or causing major market disruption.

While borrowers would be hit almost instantly, an interest rate rise would come as a relief to Britain’s army of savers who have lost out since rates were pushed down during the depths of the recession in March 2009.

The UK is facing a difficult time ahead with a slow and prolonged adjustment to the consequences of the banking and financial crisis.

Senior government sources admitted that there will be ’choppy’ times ahead, but insist that the current low rate had ‘rescued’ Britain from real economic danger.

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