26 August 2014
Pros and cons of an interest rate rise
Graeme Yorston, chief executive of Principality Building Society, talks about the anticipated interest rate rise and what that will mean for borrowers and savers.
As the economy continues to improve, employment rates continue to flourish and business confidence grows, talk around rising interest rates has become ever more prominent too.
Speculation around the potential rises due to take place is inevitably a daily occurrence within the financial services industry.
For those involved in the sector, preparations for what any such rise might mean for our products, our services and above all our Members, our borrowers and savers, has therefore been in the pipeline for quite some time.
How much consideration the average homeowner and/or saver has been able to give the issue until now however is probably, and quite understandably, a different story.
Life is busy and time is precious, and whilst some mortgage holders may have been in a position to calculate what a quarter per cent rate rise would look like on their monthly statement, for example, most are probably needing clarification.
Like others operating within the financial sector, Principality has already done the math ahead of what we think is likely to be a very minimal rise occurring most probably in the first quarter of 2015.
In real terms, a quarter per cent rise on the average mortgage equates to around an extra £20 a month – or broken down, around £5 per week – which should be manageable for the majority.
We also predict that the Governor of the Bank of England will ensure that the inevitable rise due to affect consumers will be slow and sustainable. However, homeowners shouldn’t be complacent and they need to begin considering the realities of what such a rise will mean to them and adjust any future budgeting plans accordingly now so they don’t face any future shocks.
We, and many other Banks and building societies, have been doing affordability testing on our mortgages for some time now to ensure that our Members can afford a rate rise both now and in the future.
Extra responsibilities brought in through the recent Mortgage Market Review (MMR) also mean that prospective homeowners can be tested on as much as a seven per cent interest rate basis so we are clear people that people will be able to pay their mortgage for some time in an environment with slowly rising interest rates.
Whilst planning is vital, the average householder should take comfort from the fact that they are not likely to face huge challenges from this, particularly over the next few years.
However there is some positive news from an interest rate rise and this comes for savers. After suffering nearly five years of low rates this now looks set to come to an end and a predicted rise is expected to increase competition in the savings market, bringing more favourable rates to the market.
We sympathise with savers as rates have been impacted by the generally lower demand for savers’ funds, which have resulted in lower rates. But unfortunately one lender cannot operate in isolation and offer higher rates as they would be flooded with money, with everyone trying to get a good deal, which would not be sustainable for even the biggest players in the market.
Principality is still very reliant on savers with almost 93% of our mortgages funded by savers money and we are constantly considering them when we make decisions within our business – so any rise in interest rates will certainly be welcomed by them!
For others, be reassured that those of us whose job it is to consider very closely what the impact of these impending rate rises might mean to you we have been working towards guiding you safely during the transition for quite some time.