It’s coming – the first rate rise from the Bank of England’s Base Rate of 0.5 per cent is now a realistic prospect in the next 12 months.
The move may be modest at first, but it’s been such a long period of ultra-low and unchanged rates – a full five years now – that any rate rise presents a threat for many mortgage-holders.
The issue is affordability.
The monthly mortgage payment on an interest-only loan of £100,000 rises by £83 per month for every 1 per cent increase in rate.
For those with tracker mortgages, the savings since March 2009 have been significant, but the evidence is that the lower cost of borrowing has not often been used to pay off debts.
Instead, lower mortgage costs have subsidised day-to-day living costs and funding more card and loan debt.
Base Rate is predicted to rise slowly, so a return to the pre-crunch rate of 5.5 per cent is remote.
Going back up from 0.5 per cent will not just be a gentle giving up of a windfall.
Household debt has doubled in the last ten years.
It’s reckoned that 1.2 million UK households would be spending more than half their income on loan repayments if base rate went to just four per cent.
In our business, we are seeing more mortgage applicants who have accumulated unsecured debt in the last five years and now hope that rising house prices will allow “consolidation” into mortgage debt.
Of course, this is not a trend we welcome and hints at a disguised problem.
As a result we all need to think through how to adjust to this new period of higher rates.
Wage inflation has been negative in real terms for most, so disposable income may not easily pick up the slack.
This suggests reducing consumption and off-loading debt.
Above all, it means engaging with lenders early if ends don’t meet.
Taking on debt to manage debt is no answer – especially from expensive short-term providers.
Time to do the sums.
Mark Robinson is the chief executive of Market Harborough Building Society.
For more information about the society, see its website at www.mhbs.co.uk.