Low Interest Rates Remain Essential

21st October 2010

By maintaining interest rates at the record low of 0.5 percent, the Bank of England has protected homeowners from rises to mortgage payments. We consider why this is key to preventing many from financial ruin and the possibility of losing their homes.

Since the onset of the credit crunch and recession many family incomes have been reduced because of shorter working weeks or redundancy. However, despite reduced incomes, far fewer people have suffered financial difficulties than expected.

This is particularly true in the area of home repossessions. At the beginning of 2009, the Council of Mortgage Lenders (CML) expected up to 75,000 homes to be repossessed. However, buy the end of 2009 the figure was less than 48,000.

The reason for this is the simple fact that mortgage interest rates have fallen due to the low Bank of England rate.

Many homeowners who have suffered reduced incomes have saved literally hundreds of pounds a month in interest payments. In turn this has allowed them to maintain their mortgage and other debt repayments.

The effect of rising rates

If and when the bank of England raises interest rates, this will cause massive difficulties for those whose incomes have fallen.

As soon as interest rates rise, mortgage payments will also increase. Suddenly people who have been just about maintaining their repayments to both their mortgage and other personal debts will find that they can no longer afford to do so.

The outcome will be that people who can no longer afford to pay their mortgage will start to default leading to an increased number of home repossessions.

Many individuals will try to maintain their mortgage payments to the detriment of their other debts such as credit cards and personal loans causing a significant increase in personal debt and insolvency problems.

Can incomes rise fast enough to compensate?

The bank of England is currently hoping that in the coming months the economy will improve. If employment and incomes can recover, the effects of interest rate rises to the cost of living could be offset.

However, the current prospects for incomes and employment in the UK are not good.

It is estimated that as a result of the government cost cutting requirements, up to 600,000 public sector jobs will be lost in the next five years. In addition, many families face losing hundreds of pounds in tax benefits.

As such, it is highly likely that many individuals will see their incomes become worse rather than better over the next year to eighteen months.

The financial position of many families in the UK is currently balanced on a knife edge.

Even after income reductions as a result of the recession, people have been able to maintain both mortgage and other debt payments because low interest rates have significantly reduced the cost of many mortgages.

However, if interest rates rise, the financial cushion many have been relying on will be taken away.

This will surely lead to a significant increase in the number of people who have real financial difficulties, face their homes being repossessed or are forced into declaring themselves insolvent via procedures such as a trust deed.

For this reason, rates need to be kept low for as long as possible.

Article submitted by: www.beatmydebt.com

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