Base rate hike will mean tough decisions for borrowers


Brokers believe borrowers remain well-placed to handle an increase in interest rates in the short-term although a succession of small rate hikes remains a danger.

Bank of England governor Mark Carney has long sought to prepare the ground for an eventual rate rise, which the Bank has repeatedly forecast will be gradual and at a lower level than in recent cycles.

The Bank’s Monetary Policy Committee voted last week to retain the base rate of 0.5 per cent, but for the second month in a row it failed to reach a unanimous verdict.

Of the nine members, eight voted in favour of maintaining the rate, while Ian McCafferty voted in favour of an increase of 25 basis points, citing fears that failure to act would see inflation leap beyond its target of 2 per cent.

Speculation about when an eventual increase will arise is rife, in particular for its impact on the mortgage market, with any rise likely to hit borrower’s pockets.

At the same time, the failure to move led the Council of Mortgage Lenders to reduce its forecast for 2015 and 2016 arrears and repossessions earlier this year, arguing that a change to the base rate would come later than it expected when it first issued the figures in January.

“Predictions of when rates will rise seem to change with the publication of each new economic indicator. But while the exact timing of the first rise may be uncertain, the Bank’s messaging about the pace of increases is broadly reassuring for borrowers and lenders,” a CML spokesman says.

“The Bank has repeatedly said that rates are expected to rise in a series of gentle steps, taking into account the ability of households to cope with higher costs.

“Neither lenders nor borrowers can be complacent but, given the expected profile of rate rises, the vast majority of customers will manage without encountering any payment problems.”

Chadney Bulgin mortgage partner Jonathan Clark says for most borrowers an increase of 25 basis points, like that supported by McCafferty, would equate to a monthly increase of between £15 and £20.

He says: “More people than ever are now taking out five-year fixed rates, so they’ll be protected. And while there are people on trackers most are a quarter or half a per cent above the base rate so, even for them, this shouldn’t make a big difference.

“Most people should be able to absorb rate rises just by making lifestyle changes. Although some will always get caught out, I don’t think we are going to see a raft of repossessions.

“There are always some people hanging on by their fingernails, but for the most part, I don’t think that people are mortgaged up to the max.”


Association of Mortgage Intermediaries chief executive Robert Sinclair says in addition to the growing popularity of fixed-rate deals, most new mortgage financing is based on Libor and swap rates.

“You will see increases, but it remains to be seen how much of that will be reflected in people’s costs in the short-term,” Sinclair says, adding that the base rate may have to hit 1.5 per cent to hurt many borrowers.

“There will come a point when it does hurt people, but that’s quite a way off.

“In the meantime, there will be people who a small increase does damage to, but that’s in the same way that we have repossessions now.”

Capital Fortune director Rob Killeen says those who took out loans after the 2014 implementation of the Mortgage Market Review will be in the safest positions, not least because these will have been stress-tested against base rates of up to 6 per cent.

“Pre-MMR, most people were on interest-only mortgages. Those people are probably safe in the short-term because they have just got to pay off the interest. It’s the people on repayment deals that could be in trouble.

“Small increases can be absorbed, but there will be a tipping point, and we will hit that eventually. The fact is moderate increases could continue for a period of five years and no-one knows what those increases will be.

“When base rate reaches 1.25 per cent it will start to get a bit more worrying for borrowers.”

Interest-only borrowers will, however, face challenges when their loan term ends, according to Citizens Advice.

The organisation issued a warning earlier this month that almost one million homeowners face repossession as they have no way of paying off their interest-only mortgage.

Citixens Advice chief executive Gillian guy says: “It is good rules around these mortgages have changed, but there are many people who previously took out these products and face losing their home.

“Lenders have to exhaust all other options when borrowers get into arrears – it’s time to level the playing field so that interest-only customers get the same protections when their mortgages mature.”

Chris Hulme, partner at Clayton Hulme, warns many borrowers are simply unaware of a market where the base rate is any higher than 0.5 per cent.

“You can do all the stress testing in the world but people spend what they have left.

“Because we have been at a 0.5 per cent base rate for so long, there’s a generation of borrowers that have no idea what it was like before 2007, so there is a shock going to come to a lot of people.

“Many of those people won’t be in a position of losing their homes but they will have difficult decisions to make on the things they need to cut back on.”