Interest rate rise: Borrowers have had a charmed life... but we can't keep dancing around our debts
Many borrowers are not prepared for rate rises, with some not even aware that the cost of borrowing could rise this year
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Your support makes all the difference.Interest rates were kept on hold again this week, as they have been for the previous eight years or so. That's not at all good news for savers – but could prove to be more alarming news for borrowers in the long term.
Why? Because many are not prepared for rate rises, with some not even aware that the cost of borrowing could rise this year. Let's face it, borrowers have had it pretty good in the past few years. Mortgage rates have been low and personal loan rates are still falling, with some deals out now standing at less than 4 per cent.
But that can lead to complacency, which in turn could lead to problems in the future. For financial peace of mind, it's important to be prepared for interest rate increases and to know that your budget can cope with them.
For mortgage borrowers, overpaying each month – if you can afford to – when rates are low will give you two benefits. For starters it will eat further into the outstanding amount, which will mean you owe less and therefore need to pay less interest – a big money saver.
Second, overpaying a mortgage will mean avoiding the risk of a rate shock. That's when monthly mortgage costs shoot up after an increase, which can be a huge problem if you're not prepared.
It could also be wise to fix your mortgage now at a low rate, to ensure you can afford future repayments. You can currently get a 1.49 per cent deal for two years through Norwich & Peterborough, if you have at last 35 per cent equity in your home.
If you have other debts then preparing for a rate rise is even more important, especially if you're struggling to get by now. "Those with existing financial problems will be at the sharp end of interest rate rises when they do arrive," warned Joanna Elson, chief executive of the Money Advice Trust, this week.
In short, it's essential to sort out your finances and debts now. Preparing a proper household budget is crucial in ensuring that you will be able to cope in the future. That means going back to basics and listing all income and outgoings and looking for ways to improve your finances.
If you think you'll struggle to do that, seek help. Start online, where there's plenty of free debt advice, and then head to debt charities such as Citizens Advice, which can help you reorganise your money to avoid future financial shocks.
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