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Homeowners 'must prepare now for an interest rate rise'

Monopoly piece on coins Image copyright Getty Images

Borrowers must prepare now for a rise in interest rates, a charity says, with over a million homeowners never having experienced a Bank rate increase.

Mark Carney, the Bank of England governor, last week said that a rise in the Bank Rate was "drawing closer".

The Money Advice Trust said this offered only a "short window" for people to organise their finances.

More than a million mortgage holders have only ever owned a home when rates were falling or frozen at 0.5%.

Timing

Mr Carney said that the exact timing of the first rise in the Bank Rate could not be "predicted in advance". The decision would be determined by looking at economic data.

Some analysts had thought a rise could have come at the turn of the year, but they are now expecting a possible increase in spring from the Bank Rate's record low.

Whenever it comes, it will be a new experience for more than a million homeowners making mortgage repayments, according to the Council of Mortgage Lenders (CML).

The last rise in the UK Bank Rate was an increase to 5.75% in July 2007.

About 1.8 million homeowners have taken out a mortgage for a new home since then, the CML said, although some would have owned previously then left the market.

'Short window'

Many people with debts, most notably a mortgage, could face extra costs when the Bank rate rises, the Money Advice Trust warned. For many of those with home loans, the rising cost would hit when their current deal expired.

"There remains only a relatively short window for households to prepare for the impact that higher interest rates will have on their finances," said Jane Tully, head of insight at the Trust, which runs the National Debtline.

"Rising interest rates will affect renters too, as many private landlords will pass on their higher mortgage costs to their tenants.

"Households need to look at their finances now, to make sure they can absorb these extra costs. Crucially, now is the time to act if you are worried about your ability to meet your repayments."

Research by Policis, for the CML, suggests that many homeowners have been taking a safety-first approach to their debt since the financial crisis.

"Given the importance of home ownership it is perhaps unsurprising that homeowners, overwhelmingly, regard paying the mortgage as their number one financial priority. Some 69% say that this is the case, substantially ahead of any other category of expenditure," the report said.

How a 0.25% rise in base rates might affect your mortgage
Loan size Existing monthly repayment Increase after 0.25% rise
£50,000 £283 +£7
£100,000 £566 +£13
£150,000 £849 +£20
£200,000 £1,132 +£26
£250,000 £1,415 +£33
Source :CML Base: 20 year remaining term. Repayment mortgage

'We decided to fix'

Tom Bray and Rebecca Francis own a three-bedroom semi-detached home in York.

The parents-of-two chose a tracker mortgage when they bought their home in September 2011 because they judged that there would be no rise in the Bank Rate for some time.

A couple of months ago, they moved on to a three-year fixed rate deal, believing that a rate rise was "looming" and fixed rate deals looked more attractive.

"There is no guarantee, but you have to look at the economic situation," said Mr Bray.


More from the BBC:

Homeowners hurry to remortgage

Where can I afford to live?

How would a rate rise affect me?


Short-term changes?

The 0.5% Bank Rate has been at a record low since March 2009, but the cost of mortgages has been falling during that time.

The latest minutes of the Bank of England's Monetary Policy Committee noted that lenders "did not expect mortgage interest rates to fall much further".

In fact, it said that banks' funding costs, an important influence on mortgage rates, had risen since May and "it was possible that mortgage rates would shortly begin to rise".

Views from within the industry suggest that homeowners and potential first-time buyers should keep a close eye on the situation, allowing them to decide whether to go for a fixed-rate deal and for how long.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: "History shows us that most borrowers wait until rates are actually rising before making a move to remortgage. Of course, by that point fixed rates will be much more expensive than they are now."

But Aaron Strutt, of Trinity Financial mortgage brokers, said: "Unless something drastic happens to the UK economy, it is unlikely mortgage rates will rise significantly until the Bank of England actually increases the base rate.

"The price war is still very active."

Any rate rise, when it does come, is likely to be gradual, the Bank of England has said.

How subsequent rises could affect mortgage payments
Average monthly repayment % rise in mortgage rate Increase in monthly payments
£679.74 (current average for new mortgages)
£698.90 0.25% £19.15
£718.36 0.5% £38.61
£738.13 0.75% £58.38
£758.20 1% £78.48
£778.56 1.25% £98.82
£799.23 1.50% £119.48
£820.18 1.75% £140.44
£841.43 2% £161.69
source: Halifax Base: Repayment mortgage for £150,000 loan

Cash buyers

Image copyright Reuters

Those who have already paid off their mortgage or are paying for a home in cash in full are far less concerned about any rate rise.

Housing commentator Henry Pryor estimated that 40% of buyers each month did not need any mortgage finance, and were known as cash buyers.

"These people are not concerned by the threat of rising interest rates, they could rise to 15% and it would have no direct impact," he said.

"Traditionally when house prices started to run away, or there was too much froth, generally raising rates would dampen the market taking the heat and enthusiasm with it. Today a significant proportion of the market now waves two fingers at [the Bank on] Threadneedle Street.

"Where rising rates may bite however is the buy-to-let market, already pinched by changes in the summer Budget."

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