Sam Dunn: Beware of the interest rate doom-mongers
Reports of households in 'meltdown' are grossly misleading
Sunday 13 May 2007
You couldn't accuse the Bank of England of picking a good day to bury bad news. Its Monetary Policy Committee always announces its monthly decision about what to do with interest rates at 12pm on a Thursday.
But the timing of a quarter point rise in the base rate to 5.5 per cent last week slipped neatly into the shadow of Tony Blair's resignation announcement. For once, a decision to raise the cost of borrowing failed to make the biggest headlines.
Yet it will still stoke fears about overstretched personal finances. These are usually well-founded. A move on interest rates regularly translates into changes to our personal financial circumstances, most potently and immediately on variable-rate home loans such as base-rate trackers.
To a lesser degree, annual percentage rates (APRs) on credit cards and other credit deals will also be affected but these don't always move right away, as card companies strive to be competitive in a ferocious market.
However, plenty of people already struggling with debt burdens could be pushed into an uncomfortably tight corner by higher monthly repayments.
As a general rule, each £100,000 of home loan hovering around the 7 per cent mark on a variable interest rate will cost an extra £15 to £25 a month every time rates rise by a quarter point. After four such rate rises since August, many borrowers will be trying to find an extra £100 a month to cope - no easy task.
The continued rise in insolvency figures - up by nearly a quarter year-on-year in the first three months of 2007 - are testimony to this.
Concern about rising interest rates is always worth voicing, but the popular obsession with base rate decisions has reached an almost fetishistic level that is in danger of obscuring some truths.
It's noticeable that, whenever a rate rise is announced, countless media reports breathlessly warn of the monthly cost of an average mortgage going up by the sums outlined above - and how millions of household budgets are on course for "meltdown". But these heralds of doom can be grossly misleading.
Many millions of Britons now have fixed mortgages - nearly 60 per cent of borrowers overall, according to industry estimates - that set their monthly repayments for two, three, five or 10 years.
More people took out fixed-rate mortgages in January than ever before, according to figures from the Council of Mortgage Lenders. Some 85 per cent of first-time buyers chose to fix, while 70 per cent of movers also did so.
In no way is this surprising - after all, in an environment of base-rate rises, who wouldn't consider such a move?
But what is surprising, amid the gloomy headlines, is that so-called "specialists" regularly fail to acknowledge this point. Oft-repeated claims that households face higher mortgage bills are - for a great chunk of the homeowning nation - utter nonsense.
The problem is, every time the indignant howls start up - wrongly - about rate rises hitting the average mortgage, a pervading sense of doom can set in.
This benefits no one, given that consumer confidence is key to sustaining momentum on the high street and instilling an economic feel-good factor.
The prospect of homeowners currently at the end of a fix - a two- or three-year deal, say - having to pay more each month when they remortgage is, of course, a very real one.
But many of them may already have budgeted for the extra cost, or they may earn more now than they did when they took out the original loan. Even if this is not the case, they may be able to change the term of their mortgage to keep monthly repayments at an affordable level.
And as for hundreds of thousands of other borrowers who are at least six months away from a remortgage, they could find interest rates have dropped by then, especially if inflation is back on target.
This is neither to set out a belief in a fairy-tale ending nor to gainsay the harsh economic realities many people face. But a less sensational approach to the vicissitudes of the UK housing market might - over time - go a long way to avoiding a worst-case scenario.
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