Possibly one of the most frequently asked questions from my clients is, when will interest rates rise. At this point I want to whip out my crystal ball, slip on a headscarf and dim the lights.
The question is asked for a number of reasons, mainly those with wealth would like to know if they are ever going to get back to the same levels of income they had back 1989, when the Bank of England base rate was 15%. On the flip side, those with mortgages who may have only ever borrowed at rates sub 2% have real concerns about future mortgage payments.
Unbelievably, you were able to get an interest rate over 13% on your savings in the late 80’s. On £50k this would have given you £6,500.00 per year, that could almost double your state pension income. It’s understandably disappointing that now with a typical interest rate on a savings account at just 1.2% this would provide the whooping sum of £600 per year.
On the flip side if rates were ever to return to the heady heights of 15% some borrowers would not sleep easy. Consider a mortgage of £100,000, on a repayment basis, over 25 years, with an interest rate of 2.39% (not uncommon) the monthly payment would be a comfortable £443 per month. If this rate was to rise to 5.5% this would increase the payment to a less comfortable £653. With the generous lending provided by some lenders this could be a real problem in the future.
So, we should be careful what we wish for. If it’s not you with the mortgage, then I bet you have a family member who does have one, and you could find yourself giving away your cash to help them in difficult time.
I think that it is fair to say that nobody expects to return to those shockingly high rates seen in the past, but I think it would be a wise person that considered the future before taking on a large debt at this time.
As for when, the current thinking is that rates will rise early next year, with a possible second increase later in 2018. This remains to be seen.
Kristina Bailey DipFS, CeMAP
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