MortgagesOct 1 2014

Interest rates rise will affect many borrowers

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More than a quarter of homeowners with a mortgage have said they will be in financial trouble when interest rates rise, Joanna Elson, chief executive of the Money Advice Trust, has said.

Commenting on research published by the Building Societies Association and the Money Advice Trust, she said: “After all these years, mortgage-payers are in for a big financial shock when interest rates begin to rise.

“For many, that shock will be too much to absorb – and there is a real risk that we will see a surge in unmanageable debt problems as a result.”

Ms Elson added: “Our message to borrowers is clear: interest rates will rise and that day is coming soon.”

The survey, Impact of Changing Interest Rates on Mortgage Holders, carried out by YouGov among 2,316 mortgage borrowers in August, revealed that 39 per cent of homeowners will have to cut spending to cope with rate rises.

A fifth of those asked said they will be forced to cut back on essentials such as clothing and food, while two-fifths will spend less on holidays and eating out.

Paul Broadhead, head of mortgage policy at the Building Societies Association, said: “Many consumers are only used to a low-rate environment. Although mortgage rates are not linked quite so directly to the base rate as they used to be, rates will rise as it increases.”

The survey also showed that 54 per cent believe that the Bank of England’s official bank rate will be 2 per cent or lower by mid-2017.

Mark Carney, governor of the Bank of England, has indicated that the Monetary Policy Committee expects the current low of 0.5 per cent to rise gradually to about a more long-term normal bank base rate of 3 per cent.

Last month, Treasury select committee member and Conservative MP Mark Garnier warned that households will struggle to cope with a rise in rates.

He said: “People have forgotten that 0.5 per cent is an emergency level of interest rates. For those that are already struggling, or close to struggling, raising interest rates will be a catastrophe.’

Adviser View

Mike Richards, director of London-based Mortgage Concepts Associates, said: “People are so used to the low rate that they have factored it into their standard of living. So when rates go up just a little they will have a dramatic effect.

“There are some very good fixed-rate mortgages that people should consider, and even though they might be expensive in the short term, they should consider jumping on them, especially longer-term ones such as a five-year one.”