A rate increase is round the corner, and it won't be pretty for many


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The Independent Online

When it comes to interest rates, the Bank of England’s Monetary Policy Committee has been all talk, no action since 5 March 2009 when they were pared to a historic low of 0.5 per cent.

By and large, the fact that a majority of its members have confined themselves to worrying rather than doing has proved to be a good thing for the UK economy.

However, while there have been occasional bouts of speculation about a rise over the past few years, things are now starting to get serious.

Wages have begun to consistently outstrip inflation, and by some distance. The latter, while currently at zero, is widely expected to start to nose upwards before very much longer.

Which leads us to an interesting point that was raised during the latest appearance before the Treasury Select Committee of the Bank’s Governor, Mark Carney: there are now a large number of borrowers who have never experienced a rise in base rates of any kind.

The last time that happened was just over eight years ago, on 5 July 2007, when the base rate hit a now near unthinkable 5.75 per cent. With the financial crisis percolating this was not, in retrospect, the MPC’s finest hour.

Since then, however, a small army of borrowers has taken out loans – and especially home loans – with rates either flat or falling.

No wonder MPs, and the Bank, for that matter, are worried. 

One crumb of comfort comes from the Council of Mortgage Lenders, whose figures suggest that the vast majority of new mortgages are fixed-rate products. Some  90 per cent, in fact.

So most new borrowers, during the early years of a home loan when meeting repayments is usually hardest, will be cushioned from the impact of a rate increase. Unfortunately their cushions won’t last for long. The vast majority of these new loans are short-term fixes, good for maybe a couple of years.

Britons, it seems, are still reluctant to pay the safety premium that comes with taking out a longer-term fix of five years or more.

It is to be hoped, then, that the affordability tests demanded by the Bank mean borrowers will be able to cope when they come off their short-term fixes and find themselves in an environment where rates are rather higher than they are today.

Those tests are about to be put to the test.