The Danger of Interest Rate Rises

Interest rate rises, even if they’re just increased by one quarter of a point, can have a devastating effect on homeowners. When a lot of people decide that they can afford a mortgage, they simply factor in the cost of their monthly mortgage payments as quoted at the time into their overall monthly expenditure so when interest rates suddenly rise, their incomes don’t and this can have a profound effect on their ability to balance the books in their budget.

This is of more concern for those who have taken out a fixed rate mortgage over a pre-determined length of time whereby any kind of interest rate rise can send them teetering over the edge of a financial precipice.

The problems often arise because the gap between their monthly income and their expenditure when they take out a mortgage is probably miniscule to start with. They’ll probably have a credit card or perhaps several credit cards, maybe an unsecured loan for a car or some other form of car financing agreement, alongside having to meet their essential bills each month so, consequently, when they have also factored in a new mortgage, there’s often little left over which they can spend freely.

Therefore, if there’s a sudden rise in interest rates, this increases their expenditure through no fault of their own and takes their overall expenditure higher than the money they have coming in.

That creates a domino effect and the larger the mortgage and the more financial commitments they have, the larger the effect. They might still be able to meet the payments on their mortgage even taking the rise into account but then might find that they can’t pay the minimum payment on their credit cards and other unsecured forms of borrowing they have, especially as they will have been subject to the interest rise too.

If the situation’s worse than that, it might not just be their credit cards they can’t pay but also their utility bills and council tax payments and, in the worst case scenario, they may even no longer to be able to pay back the monthly payment on their mortgage itself and, if they have no payment protection insurance to fall back on, this could ultimately lead to them having their home repossessed.

So, it is plain to see how even the smallest rise in interest rates can have a quite devastating effect on a homeowner’s finances and can result in them drowning in a sea of debt, especially if they have a number of personal and homeowner loans. The wise thing would be for homeowners to not overstretch themselves financially in the first place and keep their total debt or borrowing in a manageable state. They should always try to keep a reasonable buffer zone between the levels of their income and expenditure in the event of something like an interest rate rise and they should always be monitoring their outgoings and trying to see how they can cut them.

There are many comparison sites on the internet which can lead you to reducing your utility bills by switching suppliers and you should never be content to stick with the mortgage you have got but regularly make comparisons with other lenders who might be able to offer you a far cheaper deal.