Mortgage payers urged to think ahead about eventual impact of interest rate rises

News - Banking

Written by Ray Clancy

Wednesday, 08 September 2010 09:35

Over a quarter of British people fear Bank of England base rate rises as figures show that average monthly repayments could jump by up to £563 if Base Rate returns to pre-crunch levels.

The Bank of England’s Monetary Policy Committee is expected to hold base rate at 0.5% this week, marking 18 months of no change. But interest rates will have to start rising at some point and a new poll shows that 27% are worried about the impact this will have on their finances.

When rates eventually rise, the effect on consumers' finances could be catastrophic for many borrowers, says the survey from moneysupermarket.com. Over a quarter admitted to being worried about an increase in Base Rate affecting their mortgage repayments.

The company says that as an example someone sitting on an interest only mortgage of £150,000 on a 2.5% SVR would currently pay £312.50 per month in repayments. Should the Base Rate rise by 1%, their repayments would jump by £125 per month to £437.50, landing a hefty blow to their finances.

However, if the Base Rate rose to 5%, the level it was in October 2008 before it plummeted, the SVR could be 7% and this figure jumps to a staggering £875, over £562.50 extra per month.

In July 2007, before the onset of the credit crunch, the Base Rate was even higher at 5.75 %. If it returned to this level, borrowers on SVR could see their mortgage repayments more than triple to £968.75.

The moneysupermarket.com poll also reveals that over half of Brits, some 52%, would welcome an increase in the Base Rate to give their savings pots a much needed boost.

‘Low interest rates have been fantastic for a large proportion of UK homeowners and subsequently many people have become used to more disposable income each month. However, a Base Rate rise will push up mortgage rates forcing many families to reign in their spending, potentially causing financial problems for many,’ said Kevin Mountford, head of banking at moneysupermarket.com.

‘As the poll shows, homeowners are clearly worried about the negative effects of a Base Rate rise. Whilst it is expected that the Base Rate will creep up slowly, consumers need to understand the effect this will have on their finances and plan accordingly. Anyone sitting on their lenders SVR should consider fixing now before rates begin to rise,’ he explained.

‘Savers on the other hand will be hoping the Base Rate starts to climb sooner rather than later. But with the economy still fragile, it could be next year before we see any interest rate rises. In the meantime, savers should be doing everything they can to try and beat the effects of this low Base Rate environment and make sure they are earning the highest return possible,’ he added.