The five people who would be most affected by an interest rate rise
With interest rates at an all-time low, it’s perhaps inevitable that speculation about rate rises and their impact would be rife. We’re typically a cynical lot, and expecting things to get worse is something of a pastime in the UK! However, as with most things, a rise in interest rates would lead to winners as well as losers.
One of the keenest ways in which interest rate fluctuations are felt is through mortgages – the single largest investment for many people. Most of us don’t assess the impact of rate increases on our mortgage payments and are taken by surprise when they quickly rocket, making payments difficult. Using a mortgage calculator, like the one found here at Money Advice Service, can help explore different options and run different interest rate scenarios.
If homeowners start to struggle with mortgage payments, this has far-reaching impacts in other areas of the economy. For example, the small business owner, who may have multiple impacts: a mortgage of their own; low consumer confidence leading to fewer customers spending less; and potentially higher commercial rates. In the same vein, business owners specialising in luxury goods or services are likely to find their businesses affected as consumers cut back on discretionary spend and focus on covering essentials or opting to save rather than spend.
As well as reduced consumer confidence and a preference towards saving rather than spending, there are a number of other impacts of interest rate rises, including:
– Higher borrowing costs – on loans, credit cards and mortgages
– A stronger £ – making UK exports less competitive, and increasing imports
– Higher interest on government debt – which could lead to higher taxes
Higher borrowing costs may force people into negative equity or render them unable to move house. This could lead to a stagnation in the property market and a slow down in business for house builders or developers. The flipside of this coin is, of course, that more people may choose to rent rather than buy, leading to a boost for landlords.
Investors in markets other than property will also feel the impact of increased interest rates, and generally speaking savers benefit from periods of high interest rates, especially if their borrowing is also low. The online Telegraph recently reported that savers who rely on income from savings interest, probably still have a year to go before they start to see their investments paying more healthily. So, although for many interest rate rises are feared, for savers who have been coping with the record low interest for several years, the increase can’t start soon enough.