Homeowners advised to prepare for interest rates of 5% by MPC

Posted on January 1st, 2011 | Categories - News

Mortgage borrowers need to bear future interest rate rises in mind to help them better cope with an increase in repayments.

Interest rates will return to normal and homeowners should prepare for their mortgage payment to rise according to a Bank of England staff member.

Householders have been warned to prepare for a tenfold rise to the record low 0.5% interest rate by a member of the Monetary Policy Committee.

Paul Fisher said that interest rates will have to go back up to the standard position of around 5%.

He told The Daily Telegraph that the MPC hopes that “people are aware that interest rates at some point will go up again and that they will head back to a normalised position. What [the committee needs] to do is to trigger the mindset in people that that’s where rates will eventually go back to”.

Over seven million homeowners are at risk of rate rises with two thirds of borrowers on a variable rate mortgage plan – monthly repayment figures will increase in line with any hikes made to interest rates.

Data revealed by the Bank of England has shown that variable rate homeowners are paying an average interest of 3.28%, which is 1.06% higher than those on fixed rates. This works out to a yearly saving of £1,600 on a £150,000 mortgage.

Mr Fisher said that as of yet no rate rises have been scheduled. However, he did say that the MPC will eventually “put rates up, see what the effect is and then judge how quickly to go”.

He continued: “Obviously the first time we raise base rates that will be a big signal to people. But you’d like to think independent financial advisers and others will be bringing this home to people when they are arranging their mortgages and other borrowings”.

The low interest rates have meant that savers have not been able to make a real return on their  deposited cash where as borrowers have been able to make lower repayments on loans, mortgages and credit cards.

Mr Fish said: “We have to bear in mind savers have being doing particularly badly while borrowers have been benefiting. We can’t favour one group over another”.