Britain has kept interest rates at a record low of 0.5% since March 2009 and the Bank of England is on the cusp bumping them up incrementally.
However, according to the charity Money Advice Trust, 40% of people are not aware that rates may rise indicating they are likely to not be prepared for an increase in debt payments — especially if you’re a homeowner.
Joanna Elson, chief executive of the Money Advice Trust said on BBC Radio 5 Live this morning:
“We are worried about people who are already in financial difficulty because by definition if credit is more expensive and they already have credit commitments then that’s going to be an issue for them.
“But there’s a broader issue about preparing everybody because even people who aren’t in financial difficulty have got used to low rates.”
Low interest rates have stimulated the economy by lowering the cost of borrowing. In other words, it has helped those in debt to make repayments and boosts the amount of money in people’s pockets.
A small rate rise right now could therefore really impact homeowners, those servicing debt, and even, in real terms, impact the cost of food and energy bills. If interest rates rise, wages have to be seen as keeping up with those increases.
So the latest news from the investment banks’ research teams could spell out misery for a lot of people.
Economist Robert Wood, and his team at Bank of America Merrill Lynch, said this month that the UK is poised to not only raise rates by November 2016, but the Bank of England is also probably going hike rates three times in 2017:
Unless the data turn up dramatically in the next couple of months, we think the hurdles to a May hike are too high now. So we expect the BoE to hike rates for the first time since the financial crisis in November 2016 rather than in May.
We stick with three hikes in 2017. A potential shift in BoE strategy to lower for longer would mean, if our relatively optimistic outlook turns out to be right, faster subsequent hikes. But we assume deployment of macroprudential policy tools could take a little of the pressure off rate hikes.
Money Advice Trust’s warning isn’t the first — it’s the latest in a long line of warnings issued over the last year.
In June this 2015, Ocean Finance revealed that 7 million property owners would struggle with their mortgage payments if interest rates eked up by just 1%. Out of those surveyed, 13% said they’d outright not be able to cut costs sufficiently and would immediately fall into financial trouble.
A 1% hike is only equivalent, when looking at standard variable rate mortgages, of paying an additional £55 a month for every £100,000 owed.
A month later, the Money Advice Service warned that more than half of homeowners are not prepared for interest rate rises. Even more worryingly, 19% said they would really struggle to cover any rise in interest rates in their monthly repayments and 47% of people would find it hard to cover an increase of up to £150 extra a month.
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