Rising Interest Rates in 2015 – Can You Afford Them?
What do rising interest rates mean for you in 2015?
So, we are nearly finished with the excesses of the silly season and now trying to make amends… Time to tighten the belt again (after all that turkey, too!). Aside from the traditional New Year’s resolutions on exercising and meditating more – have you thought about your wallet?
How’s your household budget looking? Could you afford a more expensive mortgage?
What would an interest rate rise do to your mortgage repayments?
Interest rates have been at historic lows for so long that it can be easy to forget the impact of higher rates on household expenses. Additionally, newer homeowners who have taken out a mortgage in the last 5 years have not experienced a base rate above an ultra-low 0.5%.
As the UK economy recovers, speculation about an interest rate hike in the New Year is intensifying. After an increase in employment, the Bank of England is waiting for wage and productivity indicators to improve before it will lift rates. But financial markets generally expect this to happen in early 2015.
Do you know what increase you could afford?
Despite the expectations and speculations that rates could rise in the very near term, the majority of home owners don’t seem to be too concerned. In a survey conducted by NMG Consulting for the Bank of England, only 36% of home owners reported being concerned about their ability to meet their mortgage repayments if rates were to rise.
But have you considered what a rate rise would mean in terms of cash in your bank account each month? If we consider that the average mortgage debt in the UK is £83,000 then a 0.25% rate rise would cost the average home owner an additional £173 per month. The same rate rise on a £1m mortgage would cost an additional almost £2,083 per month. These are numbers that are worth thinking about…
Sailing too close to the wind
The Bank of England reports that mortgage holders become vulnerable to default when mortgage repayments reach 40% of their net income. Historically, low interest rates have led some people to borrow the maximum possible for their income at the time with the expectation that they would be able to continue funding the repayments. If rates rise at all, these households that are at the upper limit of what is affordable could find themselves financially stressed and even in default.
The Bank of England has stated it would only seek to raise rates gradually but this would also need to be in conjunction with real wages growth. The survey conducted by NMG Consulting shows that a 2% rise in interest rates would see one third of mortgage holders in distress, needing to refinance, work more or spend less on other expenses to maintain their repayments. However, when accompanied with a 10% rise in wages, the impact is substantially less. Fortunately, the Bank of England is looking to confirm wages growth before it takes any action on interest rates. Additionally, any increases would be gradual so as to protect the resurgence of the UK economy as a whole.
Should you be taking action?
Given rates have been so low for so long, it is worth looking around and seeing if you can take affixed rate or discounted rate mortgage. The international bank, HSBC, made headlines recently when it offered borrowers a mortgage rate of just 0.99%. Whilst it’s not open to everyone, it’s a reminder to shop around to check what rates are available before the inevitable rate rise, which may come in early 2015.
About Carlton Crabbe
Carlton Crabbe was previously an Ultra High Net Worth and High Net Worth wealth manager at AES International. His blog posts remain relevant for expatriate investors.