The Financial Policy Committee’s (FPC) latest Stability Report has revealed a worrying sign for borrowers according to Duncan Lawrie Private Bank. The Report, which covers the FPC’s assessment of the outlook for the stability and resilience of the financial sector, has demanded that the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) report back to the Bank of England by September 2013 on the vulnerability of borrowers to sharp upward movements in long-term interest rates.
After four years of low borrowing costs, recent volatility in the markets, following the Fed’s announcement last week on tapering QE, has spurred fears about a normalisation of interest rates and how this could impact borrowers and financial institutions themselves. If rates rose by one percentage point, to 1.5%, the Bank said households accounting for 9% of mortgage debt would need to take action. To afford that sort of rate rise, the Bank said those affected might have to consider earning more money, working longer hours, or cutting essential spending.
Matthew Parden, Managing Director at Duncan Lawrie Private Bank said: “Borrowers must start to consider the possibility of interest rates rising and budget accordingly to avoid overextending themselves.
“A simple case of individuals on two per cent interest only mortgages suddenly paying four per cent would see their monthly payments double, potentially into the thousands of pounds for average mortgages, which could end up crippling many households.
“We would advise giving consideration to longer term fixed rates of five years, as opposed to two, where rates remain at all-time lows of under three per cent.
“It is important that people act sooner rather than later and look for the best longer term deals around. Budgeting for future unknowns is absolutely fundamental if people want to protect themselves from being burnt.”
Phil Maurice, Head of Business Development at Charles Cameron, Independent Mortage Brokers said: “We are seeing a large number of borrowers looking at mitigating risks by locking themselves into fixed rates. Concern is certainly mounting over potential rate rises and the affect this will have on their lifestyle and affordability.
“There are other options for borrowers too, such as re-mortgaging to consolidate debt onto a cheaper fixed rate and some lenders are offering ten year fixed rates as demand increases.”