Tag Archives: Borrowing

Should Consumers be Prepared for a Base Rate Rise?

interest rate riseThe 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.

Rising Inflation – Flat Wages

Its no surprise now that wages are in general terms flat, with very few among us seeing the small annual pay rise that was common pre-recession.  Even more sadly, apart from those with pay frozen, there are those with wage cuts and redundancies… let alone the queues at the job centre.  Add to the mix that inflation is increasing at an alarming rate (that 2pint milk now costs 50% more than it did 10 years ago), its evident that the gap between spending and income is widening.

In the fourth quarter of 2012, the Office For National Statistics (ONS) found that real income per head had fallen by £13 to £3,767. Meanwhile, expenditure per head has increased by £4. As a result, household saving had fallen as household must now spend more.

While demand hasn’t really increased and people have been careful with what they have recently, with incomes rising more slowly than inflation, its having a catalytic effect and many ordinary people are now being forced to borrow money in order to get by.  When in need of instant cash borrowing, payday loan providers are who many people are turning to, usually if they don’t have very good credit and can’t access loans in the form of bank loans or credit cards.

There are two effects of the increased borrowing and the widening gap between real income and rate of inflation. Firstly spending will be low, this will counteract all off the government’s attempts to increase spending as a means to stimulate economic growth.  As a result to the fall in spending, firms will see fewer profits, leading to more people becoming unemployed. Homelessness charity Shelter has stated that 8 million people are on the verge of losing their jobs. With no way of being able to save, this is a very worrying situation; being dubbed as ‘the British saving crisis’.

The government need to act and are likely to do so in another attempt to increase spending. Ironically, a likely policy to increase spending could be to encourage borrowing, further widening the gap between income and spending. More borrowing would mean more spending, as people have more access to money, however incomes will not be changing.

To increase economic growth, the most effective method would be to increase spending, but when we take into account that the bad financial standing Britain is as right now was caused by unsustainable borrowing, it wouldn’t make sense to encourage such a thing. In the short run, while borrowing might increase economic growth, in the long run it will come back and burden Britain once more.

A more concrete solution must be thought of as opposed to borrowing, inflation needs to be slowed down and real wages need to catch up fast.