Published: 7 October 2014 | Author: Bernard Clarke
No-one knows for sure when the Bank of England’s monetary policy committee will make its first decision to raise interest rates, but there some practical steps that people can take now to help prepare for it.
For most borrowers, higher rates will be unwelcome, but we do not believe that they will be unmanageable. The Bank of England has repeatedly signaled that it will take into account affordability for households as it embarks on the process adjusting rates upwards from their current historic low point.
The Bank has also made it clear that it is likely to take a series of "baby steps" as it adjusts rates upwards over a period of time.
To help borrowers understand how they might be affected by rising interest rates, we have produced a series of ready reckoners showing the broad impact of a small rate rise on loans of various sizes and remaining term lengths.
We share the concerns of the Money Advice Service (MAS), which last week urged consumers to plan ahead for higher borrowing costs. As a checklist, we are suggesting it would be sensible for all borrowers to:
- Remind themselves of what rate they are currently paying, whether it is fixed or variable, and when the deal and any associated early repayment charges expire.
- Use the MAS mortgage calculator to work out what rate rises of different amounts would mean, and make sure they could cover this additional sum.
If, having done this, borrowers still believe they would struggle, we recommend going through a budgeting exercise and considering whether there are any areas of spending that could be reduced.
MAS research suggests that around half of people responding to its survey would find it difficult to cover up to £150 extra a month. But a rise of that size equates to an increase of two full percentage points on an average-sized mortgage – an increase that the markets believe will not occur before 2018.
In reality, everyone expects that such a level of increase would only be achieved by a series of small rate rises spread out over time – and accompanied by a parallel growth in income. In the short term, a quarter-point rise would add around £16 a month to the repayments on an average mortgage of around £120,000.
By planning ahead now, borrowers can get a clearer understanding of what a rate rise would mean for their own repayments, and think about any changes to their budget that they may need to make as a result.