Future interest rate increases 'could spell hardship for mortgage holders'
Published On 24 April 2007
Mortgage holders could face several years of financial hardship, after experts predicted a series of interest rate increases will be necessary to curb inflationary pressures in the UK economy.A group of leading economists have already warned that interest rates could have to increase to 7.5 per cent in the next two years if the Bank of England hopes to control inflation.
The Telegraph reports that Tim Congdon, a former professor at the London Business School said: "Inflation is back and it's going to get to four per cent by the middle of the next year ... They [the Bank] need to start raising rates by half a point.
"This is going to end in the usual way, and even if it's not as bad as earlier cycles, it is nevertheless bad."
The predictions made by the economists were backed up by the latest figures from the Building Societies Association (BSA) which showed that mortgage lending continued to increase rapidly in the first quarter of 2007, despite previous interest rate increases.
"In the first quarter of 2007, building societies recorded net lending of £4,381 million, more than double the £2,163 million in the same period in 2006. This is largely a reflection of strong approvals (loans agreed but not yet made) seen in recent months," explained Adrian Coles, director general of the BSA.
“Yet again building societies saw record lending in March, with gross lending the highest ever recorded for that month. Approvals were also the highest for any March since 1988."
Coupled with recent figures which showed that consumer price index (CPI) inflation rose to 3.1 per cent in March - 1.1 per cent above government targets - it looks increasingly likely that interest rates will be increased when the Monetary Policy Committee meets early next month.
Severe interest rate increases could have serious consequences for the typical mortgage holder in the UK, Stuart Glendinning, managing director of moneysupermarket.com, explained.
"Mortgage borrowers could be facing a massive rise in their mortgage repayments with a typical monthly payment rising to £1,037.08 per month from the current £818.75 (a difference of £218.33 a month) if the group of leading economists are right and the base rate rises to 7.5 per cent to quell inflation."
Mr Glendinning added that some borrowers could be particularly badly affected, as bank's standard variable rates (SVRs) could reach ten per cent.
"The last time mortgage rates neared this level was 15 years ago. With one in five (19 per cent) borrowers on the lender's SVR, this could be a real concern," he added.
While Mr Glenndinning admitted that a lack of supply in the UK's housing market made it unlikely that higher interest rates would cause house prices to crash, he pointed out that it could still force people to consider how they finance their home.
"Nearly two thirds (63 per cent) of borrowers say they would be forced to remortgage if their repayments increase again," he explained.
Despite these gloomy economic forecasts, some experts think that current data suggests recent interest rate increases are already slowing the housing market.
Recently, the British Bankers' Association reported that mortgage demand could be cooling.
The organisation's director of statistics, David Dooks, said: "Since interest rates began rising last August, higher mortgage costs have been absorbed by households and high lending growth continued, to keep up with rising prices.
"In the last two months, demand has moderated a little and, with no short-term prospect of costs reducing, mortgage lending growth should ease further in the months ahead."
