17th July 2015
Interest rates could rise within months signalling the end of record low mortgage deals.
Bank of England governor Mark Carney has warned that the historic low of 0.5% interest rates that the UK has witnessed for over six years could finally be coming to an end.
Carney has said households should get ready to see a rise in interest rate that will push up the cost of borrowing ‘around the turn of the year’.
Although the City was pricing in a rate rise next year, the increase could be seen within a matter of months.
The rise will hit households with a mortgage as a rise of just 0.25% to 0.75% would increase the cost of a £150,000 tracker mortgage by £18, or £216 a year.
If interest rates rise quickly to 2.5%, an extra £156 a month would be added to the loan cost.
Carney said the recovering economy, with high employment and rising wages, means an interest rate rise is needed in order to stem inflation.
‘The need for bank rate to rise reflects the momentum in the economy,’ he said. ‘It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and to a level in the medium term that is perhaps about half as high as historical averages.
‘In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.’
However, Carney is aware that indebted households will suffer and said UK households are particularly at risk as many have tracker mortgages that will increase in line with interest rate rises.
He said that if rates rise ‘over a half of UK mortgagors would pay higher rates in a year’s time and close to three quarters of mortgagors in two year’s time’.
What it means?
Chris Williams, chief executive of Wealth Horizon, said: ‘Carney has for a long time outlined plans to keep rates low for a sustained period, but his announcement this week shows how thinking among the committee members is now shifting. For investors, now is the time to prepare for a changing landscape in which some of the strategies that have been adopted in the low interest rate environment need to be reviewed.
‘Rising interest rates mean that more conservative investments like cash could start to pay higher returns. This gives investors the opportunity to play it a bit safer with their money, but expectations of a return to an environment where they can earn 5% from their current accounts remain a long way off.
‘The comments have been good news for the pound thus far, particularly against the euro, with talk of a rate rise highlighting the relative strength of the UK’s economy compared to much of the eurozone. But investors should be aware the path to normalisation is going to be a very long one.’
Calum Bennie, savings expert at Scottish Friendly, said: ‘The possibility of an interest rate rise will generate a mixed reaction in people. Those who have borrowed money will see repayments increase and may begin to struggle to keep up, while on the flip side, savers are unlikely to see a rise in savings rates for some time.
‘Those people who do think they might struggle if rates rise need to start preparing now to weather the changes. Putting aside a little extra each month will help act as a buffer so that any rise in the cost of borrowing can be mitigated.’