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UK Homeowners Face Rising Interest Rates

by Jim ONeil on December 21, 2010

in uk loans news

The Bank of England reported that over seven million homeowners in the UK are facing increasing interest rates. The bank advised people to begin paying off debts to prevent a negative financial situation
when their repayment amount increases due to additional interest. Consumers may end up spending more disposable income on mortgage interest than in two decades.

A Financial Stability Report published by the bank noted that two-thirds of mortgage holders are currently in arrangements featuring floating interest rates and this number is increasing. Some analysts believe that interest rates will increase in 2011 to combat rising inflation levels. This will result in these mortgage holders experiencing an increase in monthly mortgage payments.

In many cases, once the initial fixed-rate term of their mortgage expires, borrowers automatically end up paying the variable interest rate provided by the lender. They may do this voluntarily because it is less expensive than remortgaging. In some cases, they may be unable to remortgage because of strict lending rules imposed by the banks. The result is that they become prisoners to their own mortgage, not able to move due to the cost of borrowing.

Currently, the Bank Rate at the Bank of England is at a historic low of 0.5 percent. If it increases to five percent, families would have to reduce debt by 15 percent to cause interest payments to fall to average levels over the long-term. Just a one percent increase in interest rates will cause the monthly payment on a £150,000 mortgage to go from £909 to £989.

Economists predict that high inflation will continue in 2011, causing interest rates to rise. These two factors, combined with the loss of public sector jobs, may put some homeowners in a very bad situation. Fortunately, some predict that the Bank of England is not likely to increase interest rates until fourth quarter 2011.

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