Interest rates have been at a record low of 0.5% in the UK since the financial crisis. The purpose of lowering rates was to stimulate the economy and get mortgage payments down to encourage people to use their cash and help the economy get going again.
If you’d been on a variable rate mortgage back in 2008, you’d have been enjoying much lower payments for the last 6-7 years than you were prior to this. Getting a new mortgage has also become a lot more affordable with rates being at this record low. It’s not only home owners but buy-to-let landlords who have been taking advantage of these low rates to expand their portfolios.
There has been a lot of speculation for a while now as to when interest rates will rise in the UK. Two weeks ago Mark Carny, the Governor of the Bank of England, indicated quite strongly that he saw interest rates rising incrementally over three years, potentially starting at the end of this year. He made a point of also stating that the rate of rise would be slow and sees the upper limit at about half of what the historic average used to be, which would make it around 2-2.5%.
There has been a lot of scare mongering in the media regarding increasing rates but the advantage that you or I have is knowing that the rate rises are coming, and it would seem that the rises won’t be too drastic. Inflation is currently pretty low and truly turned marginally negative in April 2015, so the Bank of England isn’t going to be raising rates drastically in order to bring down a high inflation rate. Unless things change widely for reasons we are not currently aware of!
Before rates do rise, things you may want to consider are:
1. Credit card debt
Best practice is to always pay off your credit card in complete when you get the monthly bill, but if you’ve let it pile up, now would be a good time to start plugging away. According to an article in the Guardian, Halifax has already come out and said that as soon as the base rate goes up, so will their credit card rates. Given that people will already be paying a high rate of interest on these cards, I’m sure this won’t be welcome news!
2. Mortgage Payments
If you’re on a fixed term mortgage, you’re going to be shielded from any rate rises whilst your fixed rate is nevertheless valid. After this, standard practice is to be moved over to the edges Standard Variable Rate. This will have risen from what it is now, so although you’ll be protected for a while, those monthly payments will likely rise at some point. At the point your fixed term comes to an end, it’s always worth looking around to see what other options there are, as you may nevertheless be able to find some good deals.
Some people may rush to lock in a fixed rate mortgage now. On the confront of it, that may not be a bad idea but take into account that many fixed rate mortgages come with quite a large up front fee. Before diving in, make sure that paying that fee won’t negate all the benefits of a lower rate.
Standard Variable Rates or Tracker
People on tracker rates are going to feel the pinch straight away, as their mortgages track the Bank of England base rate. How much the mortgage payments will go up will depend on how much you’ve borrowed and what rate you’ve got. There’s a nifty online calculator on the This is Money website, where you can very easily see how much you’ll be affected by.
Those on Standard Variable Rate mortgages, or those connected to the edges Standard Variable Rate (like discounted rate mortgages), will be affected too, but not necessarily straight away. It will very much depend on whether the edges raise their rates when the Bank of England does – as they don’t have to straight away. Some people don’t think they’ll raise their rates as soon as the Bank of England does but I’d question that – how often does a bank not squeeze you for more pennies when it can?
One thing I’ve not read much about is the effect that raising rates will have on renters. Rents are already at bonkers rates in the UK. With house prices being so high it’s made getting a mortgage unreachable for many due to the high place requirements. Given that there is nevertheless strong need for rental accommodation, landlords have been taking advantage of this and raising rents to record levels in many areas of the UK. Landlords typically pass on any additional expenses onto tenants, so be aware, you may find your landlord trying to increase your rent next year.
The other factor on my mind is that the Chancellor, George Osborne, recently announced plans to prevent buy-to-let investors getting a 40-45% tax break on their mortgage interest payments and reduce this down to a maximum 20%, effectively meaning profit margins will be slashed for many. This policy will come into effect over the next 4 years but it will certainly be at the spotlight of many buy-to-let investors’ minds. The intention is to cool off the buy to let market but again, for some it will average them trying to raise their rental income to compensate.
Unless house prices start to come down to more affordable levels for the masses, I’d unfortunately expect rents to keep on rising for the time being.
But it’s not all bad – there are a few things to cheer about too.
4. Holiday cash
As a consumer, one area that people will assistance from is the rising value of the GBP. Generally, when interest rates go up, it attracts value to the associated money, so in theory, the GBP may get you more foreign money than it does now. clearly this isn’t a given as it depends on a whole spectrum of other factors, but with Europe undergoing quantitative easing and devaluing the Euro, holidays to Europe at the minimum may get more affordable.
The other obvious area to assistance many will be the interest rates that savings attract. Like many, I’ve seen savings attract a pitiful amount of interest every year. It won’t be jumping up much but at the minimum cash in the bank will start working a bit harder for those with savings.
The economy is affected by a whole large number of other things other than interest rates. so the timing of rates already now isn’t certain, but my view is that it’s always better to plan for the worst and hope for the best. Knowing that rate rises are likely to happen in the reasonably near future gives households the time to plan for when they do.
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