The Governor of the Bank of England, Mark Carney, announced last year that the likelihood of interest rate rises would come into sharper focus at the beginning of 2016, and many people feared an imminent rate increase.
However, those fears have been proven speculative, as the Bank of England’s Monetary Policy Committee voted to hold rates at their record low of 0.5% by a unanimous 9 votes to 0. Indeed the growing turmoil in international markets and slower than predicted UK growth is a sufficient combination for Carney to openly state that now is not the right time for an interest rate rise.
Previous predictions had focused on changes in late 2016 and early 2017, but Carney has been eager to stipulate that a decision will depend on economic prospects and not on a calendar date.
But what does this mean for consumers?
Whilst a rate rise is not imminent, it is still a question of “when” rather than “if” it will happen. Should consumers be using this respite from change to plan ahead and be ready for the impact?
Gillian Guy of Citizens Advice warns that many households will require time to adjust to higher outgoings, she writes:
Historically low interest rates over the past six years have made it easier for people to manage their finances.
Subsequently, the agency found that one in five homeowners will fall into arrears when interest rates eventually rise.
While the main focus will be on mortgage rates, the rate rise will also inevitably be applied to other unsecured borrowings including credit cards and loans. Now would be a good time to ensure that financial commitments are reviewed to ensure they are manageable and that an interest rate rise will not put undue stress on personal finances.
The first prudent step
The first step for mortgage holders is to ascertain whether a rate increase applies to them. Fixed-rate mortgages will offer protection from any changes as long as the agreement with the lender lasts, however those with variable-rate mortgages need to be more careful. Money advice charities emphasise the importance of understanding how much mortgage payments could increase – by using free online calculators, for instance. This represents a good first step towards managing budgets and expectations.
A belt-and-braces approach would then include a review of employment sickness benefits and insurance policies and building up an emergency fund to cover expected higher future outgoings. The latter spot of advice has few detractors in principle, of course, but also relatively few adopters, which is a shame because of its potential to maintain sanity during times when resources are stretched.
Customers’ financial position
Here at Experian, we can inform you about your customers’ individual situations in a shifting interest rate landscape. Our Affordability solutions ensure that income is verified or estimated, with a view on disposable income and how indebted the consumer is now – to influence future credit limits and potential collections strategies.
Additionally, our property data insight can help you to adjust to your borrowers’ changing circumstances. We can inform you about a customer’s home equity position and keep you notified when they may be about to move house. This allows you to remain in the driver’s seat when it comes to understanding a customer’s current and changing circumstances, understanding the risk and opportunities that they present to your organisation and allowing you to grow your portfolio by providing the insight to market new, tailored lending products that are affordable both now and in the future.
The uncertainty of interest rates, then, can be addressed sensibly by lenders and borrowers alike with a dose of relative certainty from the right data. Contact your account manager or email us if you’d like to discuss how we can help you.