If interest rates go up by 4 percent how would that affect you?

[redhat]

Ive just been reading on the BBC website that 2016 is predicted to be one of the toughest economically since the financial crisis.

I know that when interest rates go up - potentially later this year, this is likely to be done very gradually but historically interest rates of 4.5 percent are not at all unusual.

We are throwing everything at our mortgage at the moment to try to clear it as soon as we can. We're on a decent rate but the mortgage debt is high.

If interest rates went up by 2 percent or even 4 percent how would that affect you?

The risk that people are not talking about is that house prices fall and banks start demanding that mortgage holders stump up more cash to cover the difference between the value of their house and the mortgage (i.e. negative equity). Some mortgage contracts allow a bank to demand repayment of some of the mortgage immediately if the value of the house falls.

Also banks may demand repayment of overdrafts or reduce credit card limits. These are bigger risks than interest rate rises.

Banks are under severe pressure from regulators to increase the amount of capital they hold against each loan they make and reducing the amount of loans they lend on risky overdraft, credit card and consumer loans is one way to avoid having to aise capital. I am sure the economy is more at risk of a withdrawal of credit by the banks. If people can no longer borrow and have to start paying down debt that really cuts their spending power more than interest rate rises.

Its very interesting when you think about it all. I don't think the rates will shoot up quickly because I think steps will be taken to limit any damage. However I know that my DSis for example is currently overpaying on her mortgage (very slightly) but would have to make some lifestyle adjustments if the rate went up by 2 percent. In that position she might be better starting to put the "overpayment' money into a savings account for now rather than sinking it into the mortgage so that she can use it to meet any future interest rate increases. Once the overpayment has gone in then it can be taken out again but the mortgage payment is still due each month.

whoever thought there was 'no inflation' - clearly you don't buy train tickets, pay council tax bills, buy insurance (IPT up 30% last year and quadrupled since 2010)...

funnily enough, those things aren't in the 'basket' used to calculate inflation.

don't be a sucker.

And you obviously don't buy petrol or heat your home.

I'm really surprised everyone seems so relaxed at the prospect. For anyone in the early stages of paying a mortgage (when the vast majority of the monthly repayment is interest) the difference between a 2% and 4% mortgage will almost double the monthly payment.

That will make the position even harder for first time buyers and lead to stagnation in the housing market. That may reduce prices where people have to sell but people who have a choice will stay put. A stagnant housing market means people stop buying carpets and furniture, stop employing decorators, builders or kitchen fitters, even solicitors and estate agents. That then means all those people have less spending power which has a knock on effect on restaurants, holiday companies, car dealers, clothes retailers....

It would affect everyone, the only people it would be a good thing for are those who have savings and don't need employment.

I suspect the difference is that those who have had a mortgage for a while have been very conscious of the fact that rates are incredibly low at the moment and so have probably assumed a rate increase back to normal levels between 4 and 6 percent and planned accordingly. Those who are relatively new to home buying might have naively assumed that 0.5 is the norm.

When we sold our last house we rented for a year because we couldn't find a house to buy. Our equity was in an account earning 10 percent! Unheard of nowadays and that wasn't that long ago (7/8 years)

I wish I could get 10% on my savings
That'd be huge!
I mean at least 50p a year

What happened when prices tumbled in the 90's?

Also, if things that have risen sharply in price are not included in inflation figures (train fares are), that would militate against any increase in interest rates.

We would be fine as could pay mortgage off tomorrow but waiting to see what happens, i.e saving money whilst they are low.
This is only because we are further along with payments as older. We are lucky we can choose what to do with our money and would just put it into savings with a good interest rate.

I can remember interest rates zooming up to 15.5% when we were younger and it seemed like all our money went on mortgage with very little left over.
I do feel for those who have to work and pay for childcare too, because if interest rates go up too much they may have to give up work if mortgage eats into their childcare budget.

As a saver I would be overjoyed.

Interest rates won't go up any time soon, as doing so sends Gidiots 'economic plan' down the shitter. It will also kill the zombie banks, and the Tories won't allow that.

We overpay so if necessary we'd cut that down. I wouldn't be happy to do so though as it's overpayments that bring our mortgage to end before DH's 60th (6 years away), so we'd try to continue.

I think the impact is much greater on younger people who are earlier in their 'mortgage journey', where their income/expenditure is much more finely balanced.

Where did you get 10% interest last year OP? That's huge!

Not last year - I said it was 7/8 years ago

It gave our equity a good boost!

We would struggle but we've an overpayment reserve so a good buffer until I graduate and earn more (fx!).
Things are tight at the moment and not a lot of fat to cut should we need to.

Oh, my mistake, have re-read

They won't "shoot" up. The economy isn't strong enough to sustain it at the moment. I expect a gradual increase in the base rate to around 2.5% by 2020, possibly rising to around 4/5% by 2025. That is unless something drastic happens and the economy starts booming.

Not at all. We don't owe any money to anyone and we rent a council flat.

If interest rates went up by 4% we would cope, but the local economy would lose out. We would have to cut back and that would mean fewer activities for the DC, which are all locally owned and run businesses. We would postpone home repairs (again local businesses). We would eat out less (again local businesses). We would push back replacing our car. Etc.

A lot of families with mortgages would do the same. We are the engine of the economy. Frankly, retired savers with no mortgage don't consume as much (statistical fact). It is this stage in your life where you have the biggest outgoing. Once the kids fly the next and the mortgage is paid off we will be savers in a position to gain from the high interest rates, but relatively speaking we will no longer be big spenders.

This is why I don't think interest rates will rocket. It always stokes the economy to favour borrowers over savers. Throwing the brake on people in their prime earning and spending years does the national economy no favours.

I have just looked back through my statements and we at one point had a rate of 6.75%. It was a tracker so the gamble we took, but at that point we were a 2 wage household. Not long after I stopped work the rates dropped considerably, - tracker gamble paid off. So a 4% rate would still be less than we paid at first. My mil always went on about overpaying maybe we should have, but at first we were tied in and then not long after we started the family.

Is there a calculator anywhere or a formula that I could use that could help me work out what difference over paying would make please?

We pay £590 alone in interest and it would be over £300 higher with just a 2% rise. This is why we took out a five year fix; we should be in a much better LTV bracket therefore be able to attract better rates then to counteract it a bit.

Stubborn MoneySavingExpert website has an overpayment calculator that shows the difference in duration and money, with a graph.

We'd be fine and in fact I'd quite like to get some interest on our savings again. We have a mortgage with a fixed rate for 20 years - fixed at 2.9%... But I live in Belgium where it's very common and easy to get a fixed rate for the entire duration of your mortgage

Thank you sparetime I will have a look.