Finances: should I be worried about interest rate rises?

  
Those of you who have read previous blogs posts will be aware that one of my ambitions is to repay our mortgage early so I don’t have to work as much and have more time for things I love. 

Getting rid of our biggest household debt seems like a sensible plan to me and I’m being further convinced of the plan by talk of interest rate rises.

 

Just before Christmas, the US Federal Reserve increased interest rates for the first time in nearly a decade and where the US leads the UK, eventually follows.

 

The increase in UK interest rates is being pushed back due to the economy losing momentum but they will rise – with some experts predicting we will see a shift from the historic low of 0.5% at the end of the year and others believing it will be 2017. Either way, it’s coming.

 

With rising interest rates inevitably comes rising mortgage rates that will ensure more of our money is channelled into the bank rather than into our future.

 

Since we bought our first property in 2012 we have never experienced an interest rate rise but I’m not underestimating just how serious the impact could be.

 

However, I’m starting to think I’m alone with my concern as figures that came out last week from the trade union, the TUC, said unsecured borrowing on credit cards and personal loans is back to its pre-crisis level of £11,800.

 

We’ve become used to interest rates of below 1% but that isn’t normal. When the real normal of 5% returns, what will the consequence be? I don’t want to find out so am battening down the hatches in anticipation.

 

Am I right to worry, or do you think I’m over-reacting?

 

M

6 thoughts on “Finances: should I be worried about interest rate rises?

  1. I am based in the US, but rising interest rates effects all unsecured (variable) debt and will cost you more. Before the US rates went up, we locked in a fixed rate 15 year mortgage at a rock bottom rate which will save us thousands over the life of the loan. We also have no other debt to speak up so we are in good shape. I am not sure what mortgage products the UK has, but I would look into a fixed rate mortgage so you can sleep at night.

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    1. Hi! Thanks for stopping by. You’re more advanced than us re the longer term fixed mortgages. We’re 2 years into a 5 year fix. I just hope to have the mortgage down to a level where any interest rate rise is negligible as our equity will be increased. That’s based on the hope that house prices don’t crash of course! We haven’t got any other debt either so any spare money is going to the mortgage now! M

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  2. I can remember being a student in the early 90’s when interest rates probably rose to their highest level for decades. I didn’t have a mortgage then, of course, but can remember negative equity was a very serious problem. There were lots of repossessions as the market stagnated too. People couldn’t sell up and downsize, because if they sold they would still owe money to the bank. Many people had to just sit it out.

    Since we’ve had a mortgage, we have paid anywhere up to 6% interest on our mortgage and currently pay 3.5% on a fixed rate. We kind of missed out on the super low interest rates due to already being tied into a fixed rate and then couldn’t re-mortgage easily due to self-employment, so our options were limited. Some friends really benefited as they had a tracker mortgage, it seemed like the bank was virtually buying their house for them for a while.

    I think if you haven’t got additional debt, you can probably weather any rise, the problem comes when you have no room in your budget to accommodate any interest rate rise. Paying as much off your mortgage before then, will of course help a lot.

    I had a few thousand pounds worth of debt a few years ago on credit cards and an overdraft but spent two years paying them off. I am loathe to let them build up again, as I just don’t want to carry the weight of debt any more and you just never know what is around the corner. Luckily my OH hates debt and pays his credit cards off every month too, so we don’t really have much debt now and it feels a whole lot better. Like you, we are now concentrating on getting the mortgage paid off faster, to liberate ourselves in the future. It is good that you have set out on this road at a much earlier stage in your life, which should benefit you greatly in the future.

    Liked by 1 person

    1. Thanks for your very considered comment Ann and for sharing your experience. I think we are very much in the same boat. We are on a fixed rate at the mo (2.89%) but have another 3 years to run. I’m also self-employed so it was tough to nail down a really good rate but I’m happy as we were paying over 5% on our last mortgage! I think you’re right re the debt – interest rates only matter if you don’t have wiggle room in the budget. We cleared our debt, overdrafts etc before overpaying our mortgage too as it seemed like the most sensible option. I definitely don’t intend on ever being in debt again! M

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  3. Hi
    We are in a similar position. Since becoming more minimalist we are both working part time and spending more time with our daughter.

    We overpay our mortgage in two ways:
    1. We set our repayment to be about £200 more than we need to pay each month;
    2. When we have saved spare cash, we pay a lump sum off the mortgage.

    We figured that this way we won’t feel the impact of rate rises (as the minimum payment will be less than our current monthly payment), and still hope to repay in the next 5-6 years.

    We are really lucky: we bought our flat in 2006, before London prices got really stupid, we are on a good and flexible mortgage deal, and our employers both encourage part-time working.

    Thanks for the blog, by the way, inspiring stuff!

    Liked by 1 person

    1. Hi Mike, thanks for commenting. Really interesting to hear that you pay off a set amount and save separately. We’ve just been putting it all in the mortgage but makes sense to have an accessible pot too for emergencies. I’m definitely going to squirrel a bit away in the bank account now. Fantastic that you’ll be paid off in 5-6 years and kudos to you for working flexibly in order to prioritise what’s important to you. I really admire that. Whereabouts are you in London? M

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