Who benefits and who suffers from an interest rate rise?

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With the Bank of England’s base rate set to rise over the next few years, many people will be wondering if they’ll be badly hit? The rate has been at 0.5 per cent for the past five years, but with the economy slowly recovering it could leap to a ‘new normal’ of 2.5/3 per cent, prompting companies such as the Money Advice Service to provide visitors with a mortgage calculator to help them gain some kind of financial control.

As with all financial developments and changes, the rate rise will affect some people more than others. With this in mind, let’s take a closer look at who will benefit and who will suffer.

Home owners

Taking out a mortgage is one of the biggest things many people do, so it’s no wonder homeowners are starting to fret about the thought of an increased interest rate. The important thing to bear in mind, if you do have your own property, is that all mortgages are different and will be affected in different ways. There are still things you can do to limit the damage, so it’s worth assessing the pros and cons of each deal.

Fixed rate mortgages

If you’ve a fixed rate mortgage, an interest rate rise might not affect you badly at all. This is because the interest rate you pay will stay the same throughout the length of your deal, no matter what happens to Bank of England base rates. So, whether you’re locked in for two, five, 10 or 20 years, it doesn’t matter so long as your payments are continuous and up-to-date.

This is something to think about if you’ve a different arrangement or are just about to invest in a property. With the base rate set to jump at any time, it really is important to make the correct financial decision before you sign any paperwork. Whilst fixed rate mortgages are often higher than variable rate mortgages, they are ideal for anyone hoping to stick to a set budget.

Variable rate mortgages

There are many different types of variable rate mortgages but they all have one thing in common – the interest rate can change at any time. This means they will be affected by the base rate rise and home owners will have to be particularly vigilant about what they are paying out during this significant period of financial change.

If you’ve a tracker rate mortgage, for instance, your payments are likely to automatically increase, so it’s essential to ensure you have the budget for this before the change takes places. Similarly borrowers on standard variable rates could be seen to be vulnerable at this time, as the bank or building society can change their rates on a whim, choosing to pass on none, some, all or even more than a base rate rise.

People with debt

 As well as some homeowners, it’s also thought interest rates could push borrowers over the edge. Research by the think-tank Resolution Foundation found that if, (in a worst case scenario) interest rates rose to 3.9 per cent by 2017 and wages fail to keep up, an estimated 1.25 million households could end up spending half of their annual income on debt repayments. Alternatively, if the Office of Budget Responsibility’s more optimistic interest rate prediction of 1.9 per cent is correct, the outcome still isn’t great, with 700,000 households finding themselves in trouble.

With this in mind it’s wise to keep borrowing to a minimum whenever you possibly can and think ahead to the base rate rise. If you can’t afford something now, your situation could only get worse when the Bank of England makes its changes so it’s worth taking this on-board.

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