Are You Ready For Rate Rises?

With interest rates predicted to start rising later this year, we show you by how much mortgage repayments will go up. It's not a pretty sight!

Yesterday, the Bank of England's Monetary Policy Committee (MPC) voted to keep the bank's base rate at 4.5% a year for the tenth month in a row.

However, with inflation (rising prices) likely to exceed the MPC's target of 2% a year, most financial analysts agree that the next movement in the base rate will be upwards. Indeed, the money markets are forecasting a rise of around ½% to 5% over the next twelve months.

Naturally, this is good news for savers (including me), who can look forward to higher returns on our spare cash. Collectively, UK residents own a mighty £567 billion in savings, so an extra ½% or so is not to be sniffed at!

Alas, the UK also has a £1,191 billion debt mountain, consisting of £999 billion in outstanding mortgages and a further £192 billion in consumer credit (credit and store cards, car and personal loans, overdrafts and so on). If a ½% rise was applied to all of this debt, our annual interest bill would rise by £496 million a month, or just short of £6 billion a year. Given that there are 25 million households in the UK, this would mean each household would have to find an extra £20 a month, or £240 a year, to meet higher debt repayments.

Of course, the reality is that a half-point rise in the base rate would have a much smaller impact than the figure mentioned above, simply because much of our debt isn't linked to the Bank's base rate. Indeed, millions of mortgage borrowers have fixed-rate deals, and the bulk of our personal loans charge fixed rates, too.

Nevertheless, mortgage borrowers with interest rates linked to the base rate can expect their monthly mortgage repayments to start rising over the next twelve months. Furthermore, many mortgage lenders take advantage of base-rate rises by increasing their standard variable rates (SVRs) by more than the base-rate hike. For example, a 0.5% rise in the base rate might lead to a 0.65% increase in a lender's SVR. Boo, hiss!

So, if you have a variable, discounted, capped or tracker mortgage, here's what to expect when interest rates start to creep upwards:

(The following table measures the impact of rate rises on a £150,000 repayment mortgage over 25 years, with a tracker rate which exactly matches the base rate, currently 4.5% a year.)

So, a hike of two percentage points will increase the monthly repayments for this mortgage by over £188, or almost a quarter (23%). In other words, this borrower's interest bill would rise by over £2,250 a year. Ouch!

When interest rates begin to rise, many borrowers will struggle to maintain their current lifestyle, especially as they already face higher bills for council tax, utilities, fuel, plus a rising tax burden. So, rather than face financial hardship further down the line, why not take steps to strengthen your finances now?

Finally, remember that personal finance is a delicate balancing act, so keep a close eye on your expenses. Otherwise, you could be tipped over the edge!

More: Compare mortgages, compare credit cards and compare savings accounts!