Mortgage blog: Why you should brace yourself for a mortgage rate rise this year

Posted 25 June 2014

For over five years, mortgage borrowers have benefited from record low interest rates. Now, though, homeowners are being warned to brace themselves for an interest rate rise which looks increasingly certain to happen before Christmas.

The most recent comments from the Bank of England suggest that rates are set to rise in the next few months, putting over a million households at risk of mortgage default.

Rates set to rise before Christmas

The Bank of England has given its clearest indication that interest rates are set to rise this year with households warned to prepare for an increase as soon as November. The Base rate has been at its record level of 0.5 per cent since March 2009 but is finally set to rise later this year.

Recent comments by Bank governor Mark Carney that rates could increase sooner than markets expected prompted the financial markets to price in a rate rise before Christmas. Previously, experts had anticipated the first increase happening in spring 2015.

The last time that the Bank of England raised interest rates was before the crisis back in 2007, and, until recently, Mr Carney had repeatedly emphasised that he and his colleagues on the rate-setting monetary policy committee (MPC) were in no rush to hike rates, preferring to wait for signs that the UK's economic recovery was less fragile.

The Guardian reports that ‘Carney's change of tune was taken as a sign that some MPC members were already pushing for borrowing costs to rise'.

Keith Osborne, editor of new homes portal whathouse.co.uk, believes that borrowers should move to secure a mortgage deal now. "Borrowing costs have started to drift up after the Bank's comments and so if you were thinking of taking out a deal now could be the right time to do so.

"According to Moneyfacts data, the average rate for a five-year fixed mortgage has risen from 3.88 per cent to 4.17 per cent in the past year and this is set to go even higher now that a rate rise appears imminent," he added.

Over a million households face problems when rates rise

The talk of higher rates was welcomed both by savers and by those economists who argue that the solid pace of the economic growth no longer justifies crisis-level borrowing costs. However, business groups urged the Bank to be careful not to derail the recovery while there have also been warnings that many households could get into financial difficulty when rates rise.

Matthew Whittaker, chief economist at the think tank Resolution Foundation, noted that there were already 1.1 million mortgage-holders, or 13 per cent of those with home loans in the UK, who have mortgage repayments they can barely afford.

"The scale of mortgage debt in this country is still substantial, even after years of economic downturn, and it could start to look precarious for many households over the coming years," he said.

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