A rise in interest rates could be disastrous for homeowners

A rise in interest rates could be disastrous for homeowners

With interest rates set to rise once unemployment reaches 7% homeowners will be looking at their bank balances and finding ways to economise there lifestyles.  It has been mentioned in the news for years now that a rise in our record low 0.5% interest rates could be devastating for some families who are already struggling to pay their mortgage.  Your average household on a tracker mortgage currently pays £805 a month for their house, even a small 2% rise in interest rates could increase their monthly payments by £182.  The rise in interest rates is expected to lead to one in five home owners to increase work hours or make substantial cut backs on their household spending and in some cases people will lose their home.  These statistics relate to a 2% rise in interest rates, a greater rise could have an even more devastating impact on the homeowners.

A rise in interest rates will only add to an already high cost of living in the UK.  The Bank of England argues that by time the rise in interest rates comes the UK economy will be in a period of recovery and stronger economic growth.  This means people jobs will be more stable, and above inflation pay rises will once again be the norm.  However none of this is certain, and many in the public sector will not receive above inflation pay rises , and because the interest rate rise will be triggered by unemployment figures those on zero hour contracts and in part time work will be counted as employed.  So although a rise may not hurt as many as one in five homeowners, even if the economy will be well into its recovery a large group of working and lower middle class people will find themselves in a very tough financial situation when interest rates rise.

Since the Bank of England was given independence under Gordon Brown, interest rates are now out of the government’s control.  Although the Chancellor may advise the governor of the Bank of England, he cannot force him to alter interest rates.  However, the Chancellor needs to say something, although a proposed rise in minimum wage and tax cuts will cushion the blow of interest rate rises it won’t be enough to stop households suffering from a rise in their mortgage payments.  It is inevitable that interest rates will rise eventually, but a better test than unemployment rates is needed to stop them having an adverse effect on the aspirational classes.  The people who will be worst hit by a rise in interest rates are the hard working people who David Cameron constantly says his government supports.  Currently this issue is not one that is being seriously debated, mainly because a rise in interest rates is unlikely to happen before the next election.  However, the Chancellor and Prime Minister need a plan to either delay interest rate rises until people are in a better position to deal with them, or at least come up with a set of policies designed to reduce the rises impact on home owners.  It is worth noting that many people will also benefit from a rise in interest rates, it will encourage the banks to lend more to businesses, which may well lead to more jobs being created.  Also savers will enjoy a rise in interest rates, however if David Cameron is serious when he says he supports hard working people and he is trying to do something about the cost of living, he needs to ensure that a rise in interest rates does not happen before the economy is ready for it.