Print friendly version 8 Sep 2010

Quarter fearful of interest rate rises

The Bank of England is expected to hold rates at 0.5% this week, but a quarter of Brits are still afraid of the effect rises will have on their finances.

A survey by Moneysupermarket.com revealed 25% of borrowers admit to worrying that rising rates could hamper their spending power.

For example, someone sitting on an interest only mortgage of £150,000 on a 2.5% SVR would currently pay £312.50 per month in repayments. Should the base rate rise by 1%, their repayments would jump by £125 per month to £437.50, landing a hefty blow to their finances.

However, if base rate rose to 5% - the level it was in October 2008 before it plummeted - the SVR could be 7% and this figure jumps to £875, or over £562.50 extra per month, according to Moneysupermarket.

In July 2007, before the onset of the credit crunch, base rate was even higher at 5.75%. If it returned to this level, borrowers on SVR could see their mortgage repayments more than triple to £968.75.

However, the flipside is that over half of Brits (52%) polled would also welcome an increase in base rate to give their savings pots a much needed boost.

"Low interest rates have been fantastic for a large proportion of UK homeowners and subsequently many people have become used to more disposable income each month," said Kevin Mountford, head of banking at moneysupermarket.

"However, a base rate rise will push up mortgage rates forcing many families to reign in their spending - potentially causing financial problems for many," he added.

"Savers on the other hand will be hoping base rate starts to climb sooner rather than later. But with the economy still fragile, it could be next year before we see any interest rate rises. In the meantime, savers should be doing everything they can to try and beat the effects of this low base rate environment and make sure they are earning the highest return possible."


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