Interest rates predicted to rise

27th January 2011

The accountancy firm PWC, has predicted that interest rates will need to rise sooner than previously expected. Experts have been warning that interest rates were likely to have to increase towards the end of 2011, but PWC believe the move could happen as early as June. Worryingly, they are predicting interest rates are likely to reach 5% by 2015.

These potential increases are incredibly significant for families who are already burdened with debt, whether due to their mortgage repayments or unsecured credit. Around 67% of UK mortgages are currently on variable or discounted rates, both of which will almost certainly increase if the Bank of England rate goes up. A £100,000 mortgage will cost an extra £167 per month if rates rise by just two per cent. A five per cent increase would add £417 to the monthly cost of the same mortgage.

The cost of unsecured credit, such as bank loans and credit cards, would also be expected to increase. PWC’s report suggests that by 2015 an average family would have to pay an extra £1800 every year just to service their existing debts.

Perhaps partly because of increasing interest costs, PWC forecast a huge increase in household debt up to £1.9 trillion in 2015, compared to the current level of £1.45 trillion.

Such changes would have major implications for many individuals currently in a trust deed, and will undoubtedly increase the number of people for whom debt solutions such as protected trust deeds are necessary.

The average household has £8000 of debt. However, this figure masks a more pertinent statistic, as a considerable number of households have no consumer debt at all; this ensures that the average amount of debt is significantly higher than £8000 for those with any debt at all. For many such families this will be a manageable sum at the current time. The fear however, is that the additional £1800 required to service debts will tip many families over the point of affordability (and especially so if wage growth remains stagnant while inflation pushes up the cost of living).

Those individuals already in a trust deed are committed to paying a minimum monthly amount towards their debts, usually for a period of three years. This payment is calculated by deducting essential living expenses from their income. Many people currently in Scottish trust deeds will have mortgages which will increase alongside the Bank of England’s rate, as and when this happens. Without a significant increase in income levels, there is a risk that they may need to reduce their monthly trust deed payment, which would usually result in an extension of the term. In more severe cases such as an increase in mortgage costs, the protected trust deed may become an unaffordable entity, leaving bankruptcy as the only remaining option.

Even without the interest rate increase, further signs of increasing financial difficulty are being reported in the media each week. Last year UK consumers borrowed £1.2 billion from doorstep lenders, payday loan companies and pawnbrokers. This relatively new high-cost lending industry is filling the gap left by high street banks who will only lend to the most creditworthy amongst us. The end result may be a rise in insolvencies and a real risk of an increase in housing repossessions.

For further trust deed news and information, scan through our forum and read those threads and articles that apply to you. It is a free source of trustworthy information from industry experts, which can help guide you through a sticky situation.

 

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