What rate rises mean for you
Interest rates today went up for the fifth time since August.
The Bank of England raised the base rate to 5.75%, and it may not be the last rise of the year.
Here, the Chron looks at the big issues.
What will the increase mean for the average household?
One of the most obvious effects will be a rise in monthly mortgage repayments. A hike of 0.25% will add around 16 a month to the bill of a family with a typical home loan of 100,000.
When taking the last four interest rate rises into account, it means monthly mortgage costs are about 80 higher than they were last year.
People coming to the end of a two-year fixed rate or discount mortgage are also in for a shock when they come to re-mortgage, with rates on current deals around 1% to 1.5% higher than when they took their loan out.
Does this mean we will be seeing more people falling into arrears?
Experts say most households should have factored in a rise in the interest rates. But there is concern that the cumulative affect of the series of hikes seen since last summer could push some over-stretched households over the edge. A large increase in repossessions has not yet appeared on the official statistics, but debt counsellors say they have seen an increase in people coming to them with concerns over arrears.
Should borrowers be taking out fixed rate mortgages?
Taking out a fixed-rate mortgage locks the homeowner into a deal for a set period - usually two, three or five years - and as such they will be immune from further hikes. Unfortunately, most lenders have pulled their best deals from the market and the potential impact of future rate rises has already been priced into fixed rates. In July last year, homebuyers could get a two-year fixed deal at 4.69%. Today the best rate is 5.47% and that comes with a arrangement fee of almost 1,000.
What other pressures are households currently facing?
Rising interest rates are not the only pressures households are facing. Utility bills have soared during the past couple of years, while council tax, water bills and petrol prices have also risen. At the same time, wage increases are lagging behind inflation and tax is taking a bigger chunk of people's income. Savings levels also fell to their lowest levels since the early 1960s during the first quarter of this year.
What should I do if I am in trouble?
People who have over-paid their mortgage in the past may be able to take a payment holiday, but anyone who is having trouble meeting their repayments should contact their lender immediately. Under the terms of the Banking Code, lenders have to treat people "sympathetically and positively" if they get into difficulty. It is also within lenders' best interests to try to find a way through the problem with a customer, such as by temporarily reducing their repayments, or putting them on an interest-only deal for a short time.
Is there any hope for first-time buyers?
While some first-time buyers now face a five-year wait before they can raise enough money to get on to the property ladder, lenders are responding to the situation with innovative first-time buyer mortgages, often looking at how much people can afford to borrow, rather than only advancing traditional income multiples. Other initiatives include lending over a longer period of time and factoring in future earnings growth. At the same time many parents are re-mortgaging their own homes to help their offspring buy somewhere. First-time buyers also remain determined to get on to the property ladder, with many doing overtime at work or even taking on second jobs to raise the necessary funds.
What about interest-only mortgages?
While interest-only mortgages are cheaper for consumers than repayment ones, lenders are only supposed to offer them to people who have an alternative means of repaying their capital, such as an investment. It is not advisable to take out an interest-only deal just because you cannot afford a full repayment mortgage.
So, is it all doom and gloom for the consumer?
Savers have rarely had it so good. Increased competition in the savings market, caused in part by new players such as Icesave, has seen rates being offered to consumers increase by more than base rate. While the MPC has put up rates by a full point since August, the best rate for savers has gone up by up to 1.4%. In July, the leading instant access savings account on the market offered a return of 4.86%. Today's best buy offers 6.35%, figures from Moneyfacts show.
Is this likely to be the end of interest rate hikes?
Perhaps not, Nationwide, the UK's largest building society recently said there was a chance that rates could hit 6%. Many economists agree there will still be a further hike before the end of the year.
So is it fair to say that we are living in a time of high interest rates?
Interest rates are still relatively low in historic terms. Raising the rate to 5.75% will put interest rates at their highest level since February 2001. But it is still down on the 7.50% seen towards the end of the 1990s and far lower than levels seen in the late 1980s, when rates topped 14%.
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Thursday 24 May 2012
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