POLITICS
31/10/2017 07:01 GMT | Updated 31/10/2017 12:22 GMT

Mark Carney Warned: Raising Interest Rates Will Hurt Struggling Homeowners The Most

Even a small rise could have a dramatic impact on those barely managing.

PA Wire/PA Images
Bank of England Governor Mark Carney

Homeowners struggling to make ends meet will be even worse off if the Bank of England hikes interest rates this week, a financial charity has warned.

The Money Charity is concerned that even a slight rise in interest rates from their historic low of 0.25% could have severe implications for those struggling to balance mortgage repayments and personal debt.

While a modest rise of 0.25% could see mortgages increase by around £30 a month for some homeowners, those living in tight financial constraints may be forced to cut back on credit card or loan repayments to keep up payments to the bank.

That could lead to personal debt – which has a far greater interest rate than mortgages – soaring.

Another debt charity, Step Change, urged against overstating the impact of a small rate rise, but admitted that for those “living on the edge” it could have a serious impact.

Interest rates have not risen since July 2007, and were slashed to the then-historic low of 0.5% in March 2009 as a way of coping with the financial crash which had occurred just six months earlier.

But with inflation hitting 3% - and likely to increase – Bank of England Governor Mark Carney warned MPs last week a rate hike was likely in the “coming months.”

The group of nine economists who decide the base rate - the Bank of England’s Monetary Policy Committee - will announce on Thursday November 2 if rates will increase.

Speaking to HuffPost UK, The Money Charity’s Luke Humphrey said: “We are concerned the interest rise is going to hit people who are the worst off and make them even worse off.”

Referring to people with variable rate mortgages and personal loans, Humphrey said: “Somebody with both will have to prioritise between the two. That can lead to mortgages going in arrears and loans not being paid off. People who are juggling a lot of debt are going to find it a struggle.”

Which mortgages are affected by a rise in the interest rates?

Tracker rate: These are a fixed percentage either above, or sometimes, below, a certain rate – usually the base rate. When the Bank of England raises interest rates, these rise.

Standard variable rate: Similar to tracker mortgages, but these give the bank much greater flexibility to alter the interest rate on a loan outside of Bank of England decisions. However, an increase in the base rate is more than likely to be echoed in these mortgages.

Fixed rate: It might seem that fixed rate mortgages aren’t affected by a rise in interest rates, but seeing as the locked-in rate only lasts a certain number of years, when a homeowner moves to a standard variable they will be impacted by the Bank of England’s decision. Someone with two years left of their fixed rate deal might have been rubbing their hands with glee at interest rates of 0.25%. However, if the Bank of England pushes on with greater interest rate rises, they could be looking at 2-3% by 2019.

According to the Bank of England, 43% of homeowners are on tracker or variable rate mortgages – meaning they would be affected by any base rate rise.

Research by The Money Charity reveals just how precarious the finances of many in the UK are – with personal debt increasing.

Some £1.554 trillion was owed at the end of August 2017 - up from £1.5 trillion at the end of July 2016. This works out an extra £1,029.82 per UK adult.

Consumer credit debt per household stands stood at £7,492 in August, up from a revised £7,434 in July – and £538.78 extra per household over the year.

The increase in consumer credit debt comes as once again real wages lag behind what increases would be needed to keep up with inflation.

Figures released by the Office for National Statistics shows wages are once again falling in real terms – a trend which the UK looked to have dealt with in 2014/15.

ONS
CPIH is the rate of Consumer Prices Index inflation including owner occupiers’ housing costs. It is shown as negative here to demonstrate the impact it has on real wages.

Despite wages stagnating and consumer debt increasing, the Bank of England is considering raising interest rates this week for the first time since July 5 2007.

One reason is the drop in the value of the pound since the EU referendum.

Sterling is about 18% below its value in November 2015, with much of its fall taking place after June 2016. While that is good news for exporters, it has meant higher prices on imported goods, which has seen inflation increase.

One way to get inflation down is to make it more expensive to borrow money and encourage people to save more – two boxes ticked by increasing interest rates.

But such a move is not without its risks. Trying to get people to put less on the credit card would have an impact on the UK’s economic output, with consumer spending already being squeezed.

As the Bank of England’s August inflation report notes: “Output growth slowed in the first half of 2017. Much of that slowing appears to have been driven by weaker growth in household spending, as sterling’s depreciation weighed on real income growth.”

While some may see an interest rate rise as a sign not to upgrade their car or buy a new piece of furniture on credit, others will be forced to reexamine how they service their existing debts

Peter Tutton, head of policy at Step Change, believes any rise in interest rates will be slow enough to allow the majority of people to get their finances in order to cope with increase outgoings.

He told HuffPost UK: “Quite a lot will be on fixed rate deals, and they have time to try to adapt to any increase.”

Yet like The Money Charity, Tutton did sound a note of caution for those with little slack in their personal finances.

He said: “You have a lot of households experiencing negative real income. There’s the public sector pay freeze, the benefit freeze.

“Will a rate rise hurt some households? A relatively small number? Will it push them over the edge but could they recover with the right help? Yes.”

Before the Bank...

Reuters Photographer / Reuters
Norman Lamont, Conservative Chancellor on Black Wednesday.

Handing the power to set interest rates to the Bank of England was one of the key policies of New Labour in its bid to be seen as economically responsible.

Prior to the Bank deciding what the rate should be, it was the Treasury who would set the base rate.

With politicians rather than economists having the final say, the base rate level could be used to firm up a Government policy instead of squarely as a tool for economic stability.

Nowhere was this more obvious on 16 September 1992, a day known as Black Wednesday. Tory Chancellor Norman Lamont was so desperate to keep the UK in the European Exchange Rate Mechanism (ERM) - a tool designed to stop huge fluctuations between difference currencies - that he raised interest rates from 10% to 12% and then to 15% all on the same day.

He also authorised the spending of billions of pounds worth of foreign currency reserves to buy up the sterling which being frantically sold on the international markets in a bit to stop the pound crashing out of ERM by falling below the lowest level allowed.

While Lamont may have had his eye on international economics, homeowners across the country looked on aghast as they saw their mortgage rates shoot up throughout the day. 

Ian Cannell, now 65, remembers well the panic as the base rate kept growing and growing.

Then 40 years old, Cannell worked at Cambridge University and was the father of two children still at school.

“We were mortgaged up to the hilt,” he said, reflecting how even with his wife working part-time there wasn’t a lot of spare money around.

“The whole thing seemed to be out of control, our leaders didn’t seem to have an idea about what to do,” he added.

The Tories’ reputation for economic competence took decades to recover, and despite winning an election less than six months earlier Prime Minister John Major found himself behind Labour in the opinion polls.

When Gordon Brown became Chancellor in 1997 following Labour’s landslide, he handed responsibility for rate setting over to the Bank of England to avoid the interest rate being used as a political football again.