Prepare now for further interest rate rises

By MoneyhighStreet Staff. Published on June 12, 2007 This post currently has no comments.

England Bank of

The Governor of the Bank of England, Mervyn King, has issued a stark warning that interest rates will almost certainly have to rise again soon.

Tasked with keeping inflation within set limits, the Bank of England is becoming alarmed that important economic factors indicate that recent rate rises are failing to dampen inflationary pressures.

Even though there are signs that house price increases are slowing, property prices are still rising and mortgage interest payments for first time buyers are now at their highest levels for 15 years.

The growth is borrowing is also driving the costs of goods in shops and manufactured products upwards, with fears that this may also increase inflation in the near future.

Interest rates at 6.0 percent?

With rates held at 5.5% during the last meeting of the Monetary Policy Committee (MPC), this warning from Mervyn King is bound to exert pressure on the MPC to increase rates when they meet again in July.

In their ten year history, they have never raised rates by more than 0.25% at a time, so it is highly likely that rates will increase to 5.75% in July. This would add around £300 to the annual costs of a £150,000 repayment mortgage.

But will an increase to 5.75% be enough? With its resilience to the last rate rises, the property market probably needs another rate rise to slow it down further. The difficulty is achieving a balance between engineering a controlled slow down in house price increases and sending the housing market into a melt down.

Mervyn King and his team at the MPC will have to tread carefully - the economy is like a supertanker - you have to start steering miles before it turns. Too much pain with rate rises could have disastrous results in 2008. Too little pain now and more correction will be required later.

It is highly likely, though, that we will see rates at 6.0% by the end of this year - so that is yet another £300 added to the cost of the average £150,000 mortgage.

What can you do about it?

Being sensible with borrowing and spending is always a good idea, but families should realise that the cost of variable interest loan products go up when interest rates rise.

If you are just getting by with loan repayments now then two more rises of just 0.25% each could cause you real problems. Finding fixed rate mortgage and loan deals is sensible, if you have to increase your borrowing now.

There is a problem looming for the 2 million people who, according to the Council for Mortgage Lenders, took out fixed rate mortgage deals in 2005. Many of those two and three year deals are coming to an end and these borrowers are now faced with rates that are at least one percent higher.

If you are in this position, then now is the time to be trying to find the best fixed rate deals possible - preferably before another rate rise in July.

Banks and Building Societies offer good fixed rate deals, however should you consider using an independent mortgage broker, you will find that they can offer rates that are below even high street banks, depending on your circumstances.

Taking a sensible approach to borrowing

So as further rate rises look inevitable, it will pay to adopt a sensible approach to your borrowing. Search for the best fixed rate deals and decide if that extra loan is really necessary.

If you start to run into debt problems then discuss this with your utility companies and other creditors as early as possible. They may be able to help by reducing monthly payments.

Avoiding debt problems by being sensible in the first place is always a better option. Lets hope that rates don't rise too much in the near future.

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