The Bank of England’s Monetary Policy Committee (MPC) has once again chosen to keep the base rate at its historic low of 0.5%. The latest predictions suggest that the rate could now stay there for another year before finally rising from the low point it has maintained until 2009. Nonetheless, the latest vote has once again raised concerns about what the impact will be on consumers when the rate finally does increase, and questions about how much preparation the average consumer should do.
Concerns relate to the section of consumers who have debts, and most particularly mortgages. The long period for which rates have remained at their lowest ever level has led to a large number of mortgage-holders in the UK who entered while rates were affordable and have never had to face an increase. There are fears that this class of borrower may have become complacent and be ill-prepared to afford increased repayments when rates do eventually pick up.
There are also concerns about the way this could impact the wider national economy. With households having debt worth 135% of their total income and rising and higher levels of unsecured borrowing than before the financial crisis, many experts believe that the section of the population that is most vulnerable to a rate rise could also have enough collective debt to create serious national economic repercussions. Other experts, however, point out that while the size of the average mortgage is higher than pre-crisis levels, this could be offset by the fact that the percentage of households that actually have a mortgage is lower than it has been for some time.
On the individual level, the size of the impact that a rate rise would make on any given person or household is heavily dependant on circumstances. However, it is unlikely to be disastrous for the majority of people, especially given the Bank of England’s caution in introducing a rate rise and their recently-repeated intention to roll out increases slowly. Recent research suggests that the average consumer is well-positioned to deal with this kind of gradual rise. Those who have stretched their finances as far as possible to secure a mortgage they can only just comfortably afford may find themselves strained, and those who are already seriously struggling with debt will find it hardly helps their situation. For most borrowers, however, it is likely to be more an inconvenience than a big financial burden.
Nonetheless, this does not mean that being prepared is a bad idea. Whether current predictions that a rate rise will take place in about a year’s time are correct or not, at some point the base rate will increase. If you are at all concerned about the affordability of your mortgage or other borrowing should rates increase, then have a look at your situation and work out just how much you could afford and where you might be able to find financial leeway if necessary. Whether you are actively concerned or not, you may wish to consider remortgaging while rates are still low if you have the option, thereby securing yourself current rates for a longer term with your new deal.