How much will your mortgage payments grow when interest rates start to rise? Not by as much as you might fear it seems.
Barclays Mortgages issued an analysis today – the Financial Flexibility Report – of the likely increase in mortgage payments by the end of 2015. The analysis is based on data from the Centre for Economic and Business Research.
The most likely conclusion? Overall, monthly mortgage repayments in Scotland are likely to rise by just £18 a month (or 3.2%) by December 2015 (the figure is higher for other parts of the UK). Even if interest rates rose much faster than expected, what Barclays calls the ‘Drastic’ scenario, monthly payments would rise by £39 a month – see graph.
Now, no increase is going to be welcome and the report rightly points out that some groups are more vulnerable to the impact of higher repayments than others – especially those with the lowest incomes and single parent families.
But, bear in mind that the report is looking almost two years ahead. Will incomes rise to cover the extra cost? It’s impossible to know for certain, but excluding the effect of inflation and assuming that you are a basic rate taxpayer, the extra £18 a month would be covered by a pay rise of around £270 a year.
The report was clearly intended as a warning of interest rate rises to come and that is no bad thing. But, in fact, it could be read as having the opposite effect – of illustrating how slowly and how gradually rates are expected to rise.
The central assumption of the report is that the Bank of England base rate will rise to 1.25% by the start of 2016. Even in the worst case scenario envisaged by Barclays, the Bank of England base rate would rise to just 1.75% over the same period. By any historical measure, those rates are astonishingly low and, judging by comments from the Bank of England, it seems they are likely to remain low for an extended period.