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Q&A - Why you should care about interest rate rises

Interest rates have been languishing at 0.5% for almost six years now, but the smart money is on rates to start creeping up, perhaps to as high as 3% over the next three years. For some, savers for instance, this is great news, but for homeowners it could prove less attractive. 

The Money Advice Service’s Nicholas Hill, a money expert in the subject, gives us the lowdown on how any increases in interest rate may affect homeowners.

Interest rates are at a record low, so why should people worry about them?

Nick Hill: Our research shows one in five homeowners would struggle if interest rates rose. Given we don’t know when interest rates might increase, or by how much, it makes sense to start thinking about what we can do now. Let’s not forget that these are unusual times – a 0.5% interest rate has been the norm since 2009, but it won’t last. Ten years back rates were typically 5% or more.  

So, what should we do to prepare for interest rate rises?

NH: Take action now, as it makes sense to be prepared for any increase sooner rather than later. The Money Advice Service has tools that can help homeowners, such as our mortgage calculator, which is a great resource if you want to find out what the impact of any increases would be, and our budget planner. The Budget Planner is worth using to identify areas of your spending you can change for the good.  

 

What’s your advice for homeowners who are concerned about interest rates?

NH: Getting on top of your finances is essential, but you’ve also got to look after your credit report as this is what banks use to help them decide who they will lend to and at what rate they will offer. 

To be bullet proof, access more than one as you don’t know which agency – Equifax, Experian or Noddle – the banks might use. You can get a statutory report from each for £2, which is money well spent as even small errors such as a wrong address can make it harder to get a mortgage.

If you have a less than perfect credit report what can you do?

NH: Get on the electoral register for a start, and ensure your credit report details are correct. You’d be amazed at how much a small error or omission can harm you because your credit report isn’t quite right. 

Credit reports aside, what else would you recommend potential homeowners to do?

NH: I’d say keep on top of your money. You don’t want to fall behind with utility bills and other essential payments as these could count against you when you come to getting a mortgage. I’d also say if you’ve missed paying a few bills recently it’s worth taking advantage of free debt advice, getting help early can make a real difference. 

What do you think?

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  • Shipton / 4 July 2015

    For the chap who said landlords will pass on the interest rate rise: I really don't think they can. They may think they can, but a lot of tenants now are paying the absolute maximum and rents are determined by the market: supply, demand and tenant's income.

    To put it another way: if a landlord pays off his mortgage, does the rent suddenly drop? No, because his costs have little to do with the rent je can charge.

  • K.Sears / 13 February 2015

    House owners are damned if they do and damned if they don't. They would either struggle to maintain payments on their homes that would give them far more security - or, they would struggle to pay the ever increasing rents that landlords are charging. If the interest rates increase, landlords will pass on the increases to their tenants. Far better to be a house owner knowing that the money being repaid on a mortgage is money that will be returned to you in the form of your ownership of property. Money paid to a landlord is wasted.

  • James Barnett / 13 February 2015

    Two months later we are told of the likelihood of negative inflation and hence a further lowering of interest rates. So much for your economics degree.

  • johnson / 9 February 2015

    these insidious and intrusive agencies are a major contributor to the credit crunch as they damage peoples' and businesses' ability to move on by registering the slightest issues/damage abilities to raise finance etc. Their activites should be curtailed

  • Luke / 8 February 2015

    Wow I can totally relate to james on 3rd feb that Im self employed always have been financially careful and save. Having nearly a 30% deposit the sad reality is I still won't be able to get a mortgage due to low income. The system is utterly wrong on so many levels, just look at help to buy very controversial with less access to the market with only 5% deposit. Look at low interest rates hurrah at first but cries and pain in years to come when they steady increase beyond affordability. Every hard working man should be entitled to his or her home. Now I've analysed the whole market over the past two years and can confidently say its a shambles. The worrying thing is when the rates Increase even h2b customers will suffer. They say the best bet for a mortgage is aged 30-39. And older is harder for a 25year. Solution: go hell and leather to increase your income

  • Luke / 8 February 2015

    Wow I can totally relate to james on 3rd feb that Im self employed always have been financially careful and save. Having nearly a 30% deposit the sad reality is I still won't be able to get a mortgage due to low income. The system is utterly wrong on so many levels, just look at help to buy very controversial with less access to the market with only 5% deposit. Look at low interest rates hurrah at first but cries and pain in years to come when they steady increase beyond affordability. Every hard working man should be entitled to his or her home. Now I've analysed the whole market over the past two years and can confidently say its a shambles. The worrying thing is when the rates Increase even h2b customers will suffer. They say the best bet for a mortgage is aged 30-39. And older is harder for a 25year. Solution: go hell and leather to increase your income

  • ed jones / 8 February 2015

    If you think you is bad my wife and I were paying 16 percent under a certain Mrs Thatcher
    with 2 kids to support as well..but we got through it thankfully...

  • John Cupis / 8 February 2015

    I am 77 now and feel deeply sorry for young people today who are caught in a trap and cannot afford to "get on the ladder". My joint mortgage was only paid off in full because my dear wife died. It is all such a worry. Houses are getting smaller. Are they not the slums of the future? Living conditions are getting worse rather than better. My advice to all young couples is to forego all luxuries like expensive holidays, large cars and anything else that you can do without. Save hard, stay in of an evening and get used to amusing yourselves quietly and together. I continue to miss my wife terribly. Security has come at a very high price.

  • John / 8 February 2015

    We thought of down sizing, it used to be that if you down sized your property it would put some money in your pocket , not any more. All the properties we were interested in were either just as much as ours or almost as much, leaving very little in our pocket. My conclusion of the financial system is that its not there `FOR` the people of this country, its there to `USE` the people of this country. We are pawns that are used and abused by the system, we spend years struggling with our mortgages or rent, daily stressed out, terrified of losing our jobs. Anyone charging more than £300 pound a month for rent is a crook, just look at the stupid charges you are required to pay in order to rent, who pushes the price up for renting, who is so greedy and out of touch that they charge £500 a month. Is it the estate agents, I once asked an estate agent friend how he calculates a rental fee, he said. " We just look at what is being charged in general and do the same". In other words they do not think of desperate people wanting some where to live or the earnings of people, people who have not had a wage rise for years. They just go with the flow and charge what the hell they want, the only people to benefit from money misery are the `Banks`. The whole system needs changing, why is life in this supposedly enlightened age such a struggle, in my mind I see a group of people laughing and wining and dinning on good food, and underneath them I see millions working and struggling.

  • Jim / 8 February 2015

    I rather dislike the "Nanny State" that appears to affect all our lives these days, but if the powers that be spent a little more time and effort teaching basic finance to kids at schools rather than worrying whether or not they could do their 12 times tables, we'd all be a little better off. It continues to amaze me that the people who complain about not having enough money to live very often have huge credit card balances. I am a "post war" kid and was brought up to both save and only buy what I could afford and if these principles were continued today we'd all be better served. Young adults today appear all too keen on having everything NOW and then seem surprised when they find themselves in serious debt without a penny piece in savings. Early financial education, including "Cautionary Tales", should be a part of everyone's schooling - which would reduce the necessity for even more Nanny State legislation. Ah well, it's good to have a dream!

  • Angharad / 7 February 2015

    There needs to be more protection for tenants who rent privately, for those who don't want to buy or cannot afford to (although rent is commonly more than a lot of mortgages now, which is outrageous.) I rent privately and I've had to move twice in 7 months. I feel unsettled, out of pocket and my life feels chaotic. That's why I think we should have longer term tenancies and more protection for tenants as they have the raw deal in Britain. Culturally we're told it's better to buy therefore I feel pushed into buying so that I can have somewhere to call home! But I can't afford to :-(

  • waz / 7 February 2015

    SIMPLY CAN,T AFFORD IT, ITS BEEN SITUATION THE GOVERMENT AND DEPARTMENTS HAVE BEEN PUSHING IN ONE DIRECTION FOR SEVERAL YEARS NOW, ITS SIMPLY NOT WORKABLE. EVEN RENTING HAS BEEN ALLOWED FOR THE WEALTHY FEW. SO MUCH FOR EQUALITY, BUT AGAIN SEEMS LIKE A PERFECT COVER STORY TO ME. THERE ARE MANY FAMILES WHO CANNOT AFFORD THIS, OUR WAGES DO NOT GIVE ENOUGH, AND I FEEL EVEN MORE SAD FOR THOSE WHO ARE ON LESS MONEY, SORRY GUYS I DID NOT MEAN TO MAKE THAT SOUND INSULTING, I JUST THINK YOU ARE NOT INCLUDED ENOUGH IN THE BIG TOPICS OF TODAY. MORTGAGES ARE TOO MUCH STRESS, I KNOW SOME COUPLES WHO LIVE IN CONSTANT WORRY OF MISSING PAYMENTS, AFTER KNOWING WHAT PROBLEMS MORTGAGES BRING, ITS CLEAR ITS ALWAYS ON A KNIFE EDGE OF HUGES STRESS AND WORRY, THEN YOU ASK IS IT REALLY WORTH IT, I MEAN AT ALL. SIMPLY TO LIVE YOU LIFE LIKE THIS WE DECIDED NOT TO OPT FOR A MORTGAGE AS THERE ARE TOO MANY SHARKS IN THE WATER NOW.

  • Michael / 7 February 2015

    house prices went up to much too soon in the noughties, this has been the biggest problem to the economy because of inflated house prices, first time buyers cannot get on property ladder, so property market became very stagnant. If interest rates stay low, house prices will just go crazy again, so by increasing interest rates, it will help to keep house prices much more stable

  • Mia Chevais / 6 February 2015

    @john good: Thanks for posting that comment, it sounds interesting. Would you mind expanding on that a little more please? I would appreciate it.
    Thank you.

  • phil / 4 February 2015

    This does not make sense. Interest rates should stay below 1 percent for at least 5 years. Look at inflation (which is at an all time low) and the crippling debt every country is in. To raise interest rates would destroy growth.

  • James / 3 February 2015

    Tell me about it. I am a company director, I am also a independent financial adviser.
    Due to my natural tendencies as a financial adviser to be financially sensible I have been screwed over big time by the new rules.
    I pay myself a salary and dividends, there is scope to increase dividends if I need to but I have never needed to. I save at least 30% of what I pay myself in a bank account, I make very large pension contributions from my limited company, make large savings into Stocks & Shares ISA's, have a few alternative investments such as Gold Bullion and also make a few quid here and there on various trading platforms.
    I have now suffered the indignity of being an Independent Financial Adviser who has been refused a mortgage because I don't pay myself enough salary and dividends, so much for a sensible financial approach. Both myself and my partner have suffered massively financially with past divorces but we have improved our finances tremendously without the financially useless wife and husband we used to have in spite of me paying myself less than my true earnings, but the financial mayhem following each of our divorces has left us having to rent a property for the last seven years. Seven years ago I could have had a self certification mortgage but no, I decided that it would be best to save a large deposit..........Yeah Right. Seven years ago I could have taken a 100% -120% mortgage without any need for a deposit but once again I did the sensible financial adviser thing and decided to rent for a while until a large deposit was saved.
    During this seven years we have saved enough money from my pathetic income to put down a deposit of about 40% of the purchase price without sinking every penny we have into the house purchase, this is something we didn't want to do.
    However thanks to the new rules I have figured out what I need to do now.
    I'll keep my deposit in the bank, give myself a huge pay rise, give my girlfriend a huge pay rise and blow the excess on superfluous junk like so many other financially challenged idiots do. At least that way I can demonstrate affordability.
    Bleedin Idiots, banks, FCA, the lot of 'em........Bleedin idiots.

  • alan / 2 February 2015

    over 50 years average mortgages were 8% , and 5% is where it should be even in times like these , the mortgage rates should not be connected to bank rate at all. people spend what they have left and we will find ourselves in another property collapse and evictions once again.

  • DP / 30 January 2015

    Surely the answer is to fix your mortgage while rates are low? We've just fixed ours at under 3% for 5 years. I know lower rates are available if you're on variable rate or fix for less time, but there's a reason for that. I would rather be safe in the knowledge my payments will not change for 5 years, and I think that's a good rate to secure. There are such good deals out there at the moment which mean you won't have a nasty surprises if rates do go up.

  • Mark / 28 January 2015

    RUBBISH just get a mortgage broker and that way you by pass this system SIMPLE

  • Glenn Fothergill / 27 January 2015

    I already have a mortgage. Even though I have a good record of payment, My income is less than the Governments avarage. When I asked about why their interests are a lot more than the lowly 0.5%.Cheapest so far is about 3.9% interest. Those in charge of our banks and building soceities set the interest rates. Was the reply. So when the interest rates do go up. People like me on low incomes will never keep up. The banks are stil only helpfull to themselves.

  • Andew / 25 January 2015

    Good, most people need to 'downsize'. They need 'smaller' kitchens, as most people are overweight. If you are retired, you need a small flat, near a hospital, not a ten bedroomed mansion, with a huge kitchen, in the middle of nowhere. Relatives and friends will visit you only 'once or twice', then stop, and you are left there on your own. The word is DOWNSIZ

  • Lookman (author) / 25 January 2015

    Higher interest rates may make mortgages more costly, but new buyers will find prices stabilize or fall. The bad side of the market is buy to rent and buy to invest. House ownership is a good thing because as most people will be working into their seventies it allows them to evade age discrimination and have an asset to raise capital for self employment.

  • Martin Croxford / 24 January 2015

    Good advice. All very simplistic though. I find clients do not understand much on their credit reports or know how to get on electoral roll!! Lost track of the number of "totally clean" reports that contain not one paid credit line. Moving people away from term ended mortgages is possible as there are niche lenders catering for life events such as downturn in economy and child birth etc. that have been the caused of their credit problems.

  • Richard Owsley / 24 January 2015

    There's a mistake in your introduction. You say interest rates might go up 3%. That would take them to .0515% which I don't think is a problem for any homeowner is it? I expect you mean they may rise by 3 percentage points to 3.5%. If we are to consider your views at all, you need to get stuff like this right I think.

  • Andy Myers-Rodwell / 23 January 2015

    Oh you make it sound so easy, do this and do that, great but what about the damage the economic turmoil has already done to people's credit reports, what do they do! Borrowers stuck with NRAM for instance!! NRAM will not allow borrowers to change their products or term in any way, therefore they are marooned and have knowhere to turn, as soon as the rates rise to 3% or more the keys will start rolling in and properties will be repossessed by the bucket load and what happens to these borrowers. This needs to be addressed now.

  • john good / 23 January 2015

    All Mortgages are fraud the mortgage company never lends any money, what it does is monetize the mortgage deed and fails to disclose that the applicant need to submit a form of rescission to discharge the debt from their balance sheet. because they don't tell you this , they assume you have abandoned the credit you just made, claim it them selves under admiralty law do a switch on you and turn you from a creditor into a debtor. they are thieves