Will a rise in interest rates lead to more re-possessions?
Latest reports coming from the Bank Of England confirm it is a matter of time before interest rates start to rise. Experts have predicted that we will see the start of the increase as early as 2016. However will an increase in interest rates lead to more re-possessions and have an impact on people’s lives?
Interest rates are currently at an all-time low of 0.5% above base rate and have been so for a number of years now. We have definitely seen an improvement in the property market and a reduction in the amount of homes been repossessed since rates were reduced. The Council of Mortgage Lenders confirmed throughout 2014 the amount of homes been repossessed was reduced each quarter. The number of mortgages in arrears stands at 125,100 and the proportion of borrowers with arrears equivalent to 2.5% or more of their total mortgage value is 1.12% which is the lowest proportion since the first quarter of 2008. It stands to reason that with the amount of mortgages been in arrears the amount of properties been taken into possession has reduced. Possessions by lenders in the third quarter of 2014 was 0.04% (5,000 properties) which is the lowest quarterly proportion and number since the CML quarterly records began in 2008.
What will happen if rates do rise?
Although at the moment things seem positive, we are consistently reading about concerns people have about a possible rise in interest rates. Thoughts in the industry are that homeowners may currently be managing to meet their mortgage payments. However, any sort of rise in these payments may have an enormous impact on people’s ability to maintain the payments. The consensus is people do not have much flexibility in their disposal income each month to cope with an increase in monthly payments.
Low inflation and concern over the economic recovery has certainly held back any rise, however as we are now seeing a reduction in unemployment the chances are the experts prediction of an increase in interest rates throughout 2016 will be correct.
Homeowner’s currently in financial difficulty will really feel the effect of any rise in interest rates. If rates rise significantly even those currently managing their finances fine may feel the pinch. According to the Bank of England’s calculations, 2 borrowers in 5 will need to take some kind of action if interest rates rose by 2%. However, if their incomes rose by 10% just 1 in 25 would be affected. In other words the affordability of mortgage borrowers if interest rates rise will be greatly dependent on rise in income.
However, Barclays and the Centre of Economic Business conducted a survey and concluded that as many as 3 in 4 borrowers could be in danger if interest rates were to rise. They found that most borrowers are failing to put money aside for an interest rate rise.
If you are a homeowner currently on an interest only mortgage you may have experienced huge benefits when interest rates were reduced as your monthly payments will have reduced significantly. If we do see an increase in rates those on interest only mortgages could suffer. For example, if you are currently on a tracker mortgage following base rate plus 1% you would see the cost of a £150,000 interest-only mortgage soar from £188 a month to £500 a month if base rates rose to 3%, and to £750 a month if it hit 5%. If people do experience such heavy increases in monthly payments they may have no option but to sell their property.
Selling the property would me a much better option for the homeowner than falling into arrears. There are a number of options available to people who need to sell their house fast. Fast Move has two options for people needing to sell their home.
- We Buy Any House – This area of the business will actually buy the property from the homeowner direct. Although you may feel the offer is slightly low this is the fastest way to sell a property and may get you out of a possible financial disaster. So much so the money could be in your bank in as little as 7 days.
- Fast Move also has a department that specialise in selling people’s property fast. However, unlike a local estate they are managing to sell people’s homes in 4 weeks. These statistics demonstrate how pro-active the team at Fast Move are.
If there is a rise in interest rates in order to keep repossessions at their current level the average household income is going to have to increase. If not it is inevitable that more homeowners will fall into arrears and as a result repossessions will increase. Interest rate rises would tip millions of already-precarious households into financial disaster.