Interest rates might rise in 2015, but who should be concerned?

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Nick Moules
10th September 2014

After five years of record lows, Mark Carney seems to be preparing the UK for a rise in the early part of 2015. It’s an encouraging sign of health in the UK economy, particularly after the Bank of England’s governor identified inflation and unemployment as the barometers for making the change.

This suggests life is getting a bit easier for the vast majority of people in the UK – and the governor has been careful to faze this in slowly – there are many who are concerned about the impact of a rate rise on family and business finances and the wider recovery.

For businesses, the time to read the small print in bank loan agreements is now. Repayments or fees linked to interest rate movements could destabilise a business, so refinancing away from a bank facility now could save a nasty surprise when rates do go up.

Peer-to-peer lending

“How will peer-to-peer survive an interest-rate rise” is a question often asked of platforms. Easily should be the answer. The fundamental business model of creating value for both parties through low overheads should not be impacted by an interest rate rise, it will just shift the rates paid and received up a notch or two.

Market forces should dictate that these rises are proportionately less than in other areas of the market (i.e. where funding is dictated by central bank interest rates).

It might encourage banks to open lending criteria as returns could justify underwriting activity, but the constant strain of Basel III regulations may mean the business loan market is not deemed lucrative enough for banks to step up activity.

Lenders should be aware that an interest rate rise is historically applied to savings accounts after it is applied to loans, credit cards and overdrafts. This window can be very profitable for banks.

Psychologically, a return to savings rates of 2.5-3.5% might be attractive and move lenders away from alternatives. However, people should consider whether those improved returns are outweighing inflation and the likely increased costs of any borrowing they have, like a mortgage.

Our property obsession

The housing market is the obvious place to start for family and investment finances. One one hand, it might mean a slowdown in the market as repayments on mortgages become less affordable and upsizing is less attractive, particularly in the context of a delayed real wage rise, which Mr Carney hinted at this week when he addressed Trade Union members. Wages fell 0.2% in the three months to June this year, a decline that contrasted sharply with inflation of 1.6% in July.

However, interest rates mean nothing to cash buyers, which is apparently fuelling the market in London. Where the pain will be felt in London is by those who have only known a record-low interest rate environment. Even the most well-heeled of owners might feel the squeeze were rates to move by half a per cent or more in the next 12 months, when one considers the cost of properties in exclusive boroughs like Westminster or Kensington and Chelsea. A mortgage repayment of several thousands of pounds a month increasing by another £500-1,000 would surely squeeze other areas of the economy, like retail, which has made something of a recovery.

Indeed, according to HML, the mortgage servicing outsourcer, Greater London is forecast to experience the most repossessions in the second half of this year at 1,383. This could rise further with an interest rate hike.

Buy-to-let might experience a delayed boost. While rates may go up for borrowers, demand for rental property could also increase steadily as the interest rate rise is passed on to would-be buyers who find repayments unaffordable while real wage growth stagnates.

Finally, it could spark debate over government intervention in the market again. Policy makers will be keen to make sure first time buyers can continue to access the market, but mortgage underwriting requirements imposed on lenders stringently assess affordability in a borrower to avoid the mistakes of the previous boom.

It’s

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