For now interest rates will remain at an all-time low of 0.25%, but as we well know interest rate rises are on their way. These rates are the lowest in the Bank of England’s 323 year history, there are a number of concerns for those who have mortgage debts when these rates do begin to rise. Rachel Springall, of Moneyfacts says: “Just a slight rise to the Bank of England base rate could really hit consumer finances hard.”
The National Institute of Economic and Social Research has revised their predictions for a rate hike to the start of 2018, rather than 2019. Mark Carney, the governor of the Bank of England said they were likely to rise by more than the markets are expecting.
If the rates were to rise by 0.25% a family with a £200,000 mortgage on a 25-year term would see an increase in their repayments of £300 a year. David Blake, of Which Mortgage, advised that borrowers need to plan ahead and understand the implications of a rate rise. Of course, if you are on a fixed rate you will not be affected until the end of your fix term, but the rise at this point could be significant.
The main concern raised is that consumer debt has been growing in recent years. The length of the average mortgage has increased with more than 15% of mortgages now having a term of 35 years, this is up from 2.7% in 2005! The sums borrowed in relation to income have also increased, with a rise in lenders offering 4.5 times borrower income. The Bank of England informed lenders that they would face action against reckless practice, this relates to credit cards, car finance and personal loans. David Blake defended mortgage professionals stating that “lenders are required to future-proof their lending and so stress test their borrowing at the higher assumed interest rates if around 5% to 7%.” This is to ensure repayments are still affordable following rate rises.
The general advice is to make overpayments where possible while rates remain low, to reduce your overall debt. It is also wise to consider the move to a fix term mortgage in the near future to future proof your borrowing for as long as possible.