Reaction to interest rate rise: Danger ahead or don’t believe the hype?

Personal finance experts have responded to the 0.5 percent interest rate rise with split views.

Reaction to interest rate rise: Danger ahead or don’t believe the hype?

Personal finance experts have responded to the interest rate rise to 0.5 percent, with views split between fears for borrowers just about managing, and those who think mortgage borrowers will avoid financial ruin.

The Bank of England voted this week (2 November) to raise base rate for the first time in 10 years, but any hype around a resulting financial disaster for many UK home owners has been tempered by views that many mortgage borrowers will be protected.

However IVA companies and debt advice providers are more convinced that rate rises spell danger for a sizable chunk of the population who fit the ’just about managing’ demographic.

 Here are some of the latest industry views:

Joanna Elson, chief executive, Money Advice Trust:

“This first rate rise in more than a decade could be a turning point for many households. Future interest rate rises are likely to be slow and gradual – but even small increases in costs could cause significant problems for many households.

“High levels of household debt, a renewed squeeze on wages and now the prospect of higher interest rates threaten to be a dangerous mix for many households. Calls to National Debtline are already up 10 percent this year, and we expect demand for debt advice to increase significantly in a higher interest rate environment.” 

David Rankin, director of insolvency at Creditfix – the UK’s largest provider of IVAs:

“This interest rate rise, while seemingly a positive move for the economy, will jeopardise the precarious financial stability of thousands of people across the country who are just about managing.

“This interest rate rise is bad news for the vulnerable middle who are on the cusp of financial ruin. The reality is that a huge proportion of people who are close to experiencing severe financial problems are actually home owners – and even the slightest increase in their mortgage repayments could trigger severe financial difficulties. They keep their anxiety under wraps while supporting their families. They often work multiple jobs and are silently oppressed by the burden of owing creditors.”

Eric Leenders, head of personal finance, UK Finance:

“Given that lenders offering variable rates assess a customer’s ability to pay at much higher interest rates, most should be able to cope with any increases as they filter down.”

June Deasy, head of mortgage policy, UK Finance:

“Most borrowers will be protected from any immediate effects of today’s small increase because they have a fixed-rate mortgage. Over the last year, two thirds of first-time buyers have opted to fix their rate for up to two years, with a further one in four opting to fix for two to five years.

“Rates remain very low by historical standards and borrowers remain well placed to get a good deal from the UK’s increasingly competitive mortgage market.”

Rain Newton-Smith, chief economist, CBI:

“While it’s the first rate rise in over a decade, it is only taking the rate back to the level seen in August 2016 and at 0.5 percent it remains near rock bottom. Businesses will be watching the reaction of consumers closely and what’s important is the pace of any future rises. As rates creep up, it’ll be important to keep an eye on the impact for those at the lower end of the income scale.”

“This rate rise is largely symbolic. At the same time, it’s also a year too late”

Angus Dent, chief executive, ArchOver:

“Dropping the interest rate below 0.5 percent was the wrong decision in the first place. The bank should have pushed rates up to 0.75 percent as a show of strength that would have driven inflation down as the pound rose.

“Although this rise is unlikely to have any major material effects, it is a return to the trajectory we should have been on for the past year. For many, the move towards a higher interest rate will simply mean business as usual. This rate rise is largely symbolic. At the same time, it’s also a year too late.”