Rise in interest rates

[Snoggledog]

Panic ye not dear fellows! This hasn't happened (yet).

I'm trying to work out what effect a rise in interest rates and the BOE base rate would have on Joe Public. Let's say for arguments sake it goes from it's current low level to say 25% over a short period of time. What effect would this have on us?

[Kudos]

25%? We'd be fooked

[anonymous-user]

25% is a ridiculously high number based on recent history.

I think we, as a country, would be in big big trouble if base rates hit 4% in the near future.

[scenario8]

Yep, count me in with the bankrupt crowd.

[Jasandjules]

scenario8 said:

Yep, count me in with the bankrupt crowd.

At 25% I think most people would be.

[Zaxxon]

Yup, out on my ear

[crankedup]

During a period in the late eighties my interest rate on my mortgage doubled within about one year, it ended up at 17.5%. Can't recall which party were in Government at the time

[-Pete-]

The history is here http://www.bankofengland.co.uk/mfsd/iadb/Repo.asp

Those of us over a certain age can easily remember double-digit base rates, and I'm sure it could come back again.

For me, it would mean it'd be worth starting to save again. And I expect a lot of pensioners would get off the breadline, maybe even treat themselves to heating in the winter.

[uknick]

They doubled under the Tories.

[anonymous-user]

80's interest rates really aren't useful in these debates, unless you are going to normalise them to today. Big numbers have shock value, but little else.

[-Pete-]

coanda said:

80's interest rates really aren't useful in these debates, unless you are going to normalise them to today. Big numbers have shock value, but little else.

Go on, I'm intrigued. Why was it not relevant that my monthly mortgage payments doubled, but my income didn't?

[PoleDriver]

I lost my house years ago... £104K mortgage at 18%APR. People these days don't know they're born.
I wish they would raise the rates, about time the savers earned some interest!

[-Pete-]

anonymous said:

[redacted]

My circumstances may be unusual. I was spending about 60% of my income on the mortgage, after a divorce and trying to get back on my feet. Bricks & mortar and all that. I was self-employed, and my customers didn't suddenly let me double my prices. I was interest-only plus endowments - you know, the ones that have given me a negative ROI over 20+ years in real terms. And I don't know what you mean in D), my £80K house dropped to £55K over 3 years, not sure how that helped me.

[scenario8]

You're right I don't know I'm born.

However, (as I've bored regular readers with previously) in order to live in a home barely approaching the size or standard of my elder siblings or parents I need to borrow huge multiples of my income. That hurts even at today's rates. (I am aware raising a family in a one berdoom flat is possible)

Yes, some pensioners would receive a higher return on their money, but the value of older generations' real assets (their homes) would fall through the floor.

[carmonk]

25%? I'd retire.

[JagLover]

coanda said:

80's interest rates really aren't useful in these debates, unless you are going to normalise them to today. Big numbers have shock value, but little else.

Are they not?

The reason why interest rates were so high in the 1980s is that inflationary expectations had become entrenched during the 1970s. A period of poor growth, high oil prices and overly lax monetary policy, not at all like today of course

The BOE has made a conscious decision to inflate away our debts and at some point will need to regain control over inflation again. 25% interest rates are rather far fetched but 8-10% is possible.

[Snoggledog]

Hmm.. Not quite the responses I was hoping for. Ok. Let's say a rise to 5% instead of 25%. What effect would this have on Mr and Mrs Joe Blow on the street? They're average, late 30's to early 40's, married with one young kid and another on the way. Between them they're earning 60k or thereabouts and they live in a small terraced in a pleasant area with 120k mortgage. What would the rise mean to them?

[scenario8]

Honestly if they're average they wouldn't be earning that sort of figure and they would be unlikely to live in a house that small with a mortgage that relatively large.

But anyway, a rise to 5% wouldn't make a massive difference to that couple. Certainly not a life changing event difference. Unless they lost their job as those rates filtered down to lower demand in the wider economy...

[Randy Winkman]

anonymous said:

[redacted]

So all those people whose lives were screwed up under the Tories were imagining it?

[-Pete-]

That's the problem, basically anyone who borrowed more than 5x income is insolvent. And the way-beyond-their-means BTL brigade get their just desserts.

House prices will crash, unless the lenders decide to let people renegotiate... the sensible option. You can't easily get out of 20 years of negligent lending.

On the other hand, all those who paid off their debts and saved for retirement are free to enjoy life again.

The average mortgage rate, since I first bought a house, is around 7%. Those who can't handle this rate are in for a shock, IMO.