Britons are now being warned to brace themselves for a significant rate hike in 2015
Tim Wheeldon is joint managing director of Fluent Money
After seven years of interest rates at a record low, Britons are now being warned to brace themselves for a significant rate hike in 2015.
This is thanks to a quicker than anticipated economic recovery, aided by intervening factors such as rapidly rising employment rates and a slightly slower rise in wages. These factors mean that it is now anticipated that the Bank of England could raise interest rates from 0.5 to 3% – dropping again to around 2.8% – with the increase taking effect as soon as February 2015.
Although this increase is relatively mild, as Carney and co are keen to stress, the rate rise could exert a huge impact on the households that currently occupy peripheral debt areas. These include those that have previously been in arrears or had other overdue debts (even when they have been repaid), those undergoing forbearance measures, and those that took out self-certified, high loan-to-value or high loan-to-income mortgages prior to the financial crisis.
For this ‘highly geared’ debtor bracket, even the mildest rate jump could prove catastrophic. However, effort from lenders to contact these individuals and provide solid advice could help prevent debt as a result of the interest rate rise, and must be a priority.
The housing market is also a vital component in the impending rate rise decision, as up to 2.3 million households could now face difficulties meeting repayments.
As close media scrutiny has revealed over the last few months, this housing quandary is now longer confined to the Capital, but could put serious pressure on homeowners across all regions.
Lenders now have the opportunity to identify the borrowers that projected rate rises will impact upon, and do everything in their power to neutralise the incoming threat of rising debts.
The recent influx of stringent FCA regulations for loan applications and mortgage reviews means this won’t necessarily be an easy task, but there are parts of the FCA guidelines aimed at curing this ‘hangover’ of overhanging household debt that the interest rate rise could bring.
The FCA ‘Hangover Cure’ encourages lenders to set up a medium fixed-rate mortgage deal so that customers will have at least one alternative to the standard variable rate. Another suggestion is that lenders offer five-year deals as a means to protect customers from the potential rise in monthly payments, reducing the inevitable stress of rising debts.
There have also been strategies suggested by think tanks to help people avoid losing their homes by introducing ‘soft exit’ plans, which could either invite customers to trade down to shared ownership or give borrowers extended time to sell their properties, as well as providing them with estate agent and legal fees.
These initiatives are valuable not just to customers, or even just lenders, as the hesitation to implement these changes could see further repercussions across the wider economy. If preventative measures are not taken to minimise debt, or the correct information is not conveyed to customers, then we could find ourselves heading back towards recession.
One thing that we know from experience is that British customers will take on whatever they feel is necessary to pay off their debts, cutting spending wherever they can. This loss in expenditure for the overall national economy at an already delicate financial period for the UK presents some worrying predictions for the future, making now the time to act.
The potential for recession puts the onus on lenders and personal finance advisors to make sure that customers have all of the essential information, and to remove any obstacles that could appear on a customer’s route to financial stability.
If the industry forecasts are to be accepted, we now have six months to engage customers and plan for a substantial rate rise, whether this is understood to be ‘mild’ by the governor or not.
This is because the warnings should not only be read as intended for customers that risk waking up with a household debt hangover, but also for the financial experts that can be ready and waiting with the cure.
