How to prepare your clients for interest rate rises

by: Stuart Freeman
  • 08/10/2013
  • 0
How to prepare your clients for interest rate rises
As Oscar Wilde once said there are only two things certain in life death and taxes. If he were alive today he may well add that interest rates will rise at some point from their current levels.

Brokers are often asked when they think interest rates are likely to rise and no one, even Mark Carney, can answer that question with any absolute certainty. However we do know they will rise at some point and when they do, should we and our clients expect a huge spike in arrears and repossessions and for the housing market to come crashing down?

Let’s look at the figures first of all. In the UK as of June 2013 the average mortgage stood at £95,883 which over a 25 year mortgage term at an average rate of 4.75% on a repayment basis works out at approximately £547 pcm.

A 1% rise in mortgage interest rates would see the monthly payments increase by £57, a 2% increase would lead to a £118 per month overall increase and if the rate rose by 3% this would equate to a £178 pcm rise in mortgage payments.

These sorts of rises in interest rates will see many average income families tightening spending, with some facing hardship if they pay the increased payments.

However there is no reason to believe that for the overwhelming majority of borrowers faced even with a 3% rise in rates it would lead them to arrears and repossession. This was borne out by the fact that during 2008 despite a Base Rate 4.5% higher than today arrears stayed relatively low.

Whilst the drop in rates in the last five years has saved some loans from going bad and inevitably a number will go bad when rates rise; the most likely outcome will be that the market will simply cool down and the much talked about bubble will simply deflate.

That said clients should always consider the effect of increased payments especially those on variable rate or shorter term fixed rate mortgage deals. Indeed when rates start rising there should be a lot more opportunity for brokers in the remortgage market than today.

As rates rise, borrowers on historically low standard variable rates currently uninterested in moving lenders or deals, will inevitably start to look to reduce their costs again. Brokers will be better placed to contact clients, as lenders understandably are often far from pro-active in obtaining better rates for their borrowers.

Stuart Freeman is director of Redbrick FS

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