Interest rates could rise sixfold in three years


Interest rates will rise six-fold by 2017 as Britain’s economy becomes one of the fastest growing in the developed world, the Bank of England Governor said on Tuesday.

The increase to more “normal” levels will be welcomed by many savers who have faced record low rates for more than six years, but is likely to plunge many borrowers into financial difficulty.

Mark Carney said that Bank rate could reach 3 per cent within three years, six times the current 0.5 per cent.

The comments come as millions of Britons are deciding where to invest this year’s Isa savings, and the traditional home-buying season is about to start.

Brokers are expecting a rush of borrowers wanting to fix their mortgages, while savers face a dilemma over where to put their money to take advantage of the future increases.

The Governor’s remarks came as the Organisation for Economic Co-operation and Development said Britain was now experiencing the fastest growth of the world’s major economies.

The UK will grow by 3.3 per cent in the first half of this year, the OECD said, faster than any other G7 nation.

After the longest and deepest downturn since the Second World War, Mr Carney told MPs the UK was finally returning to full growth, allowing the Bank of England to raise Bank rate from its record low of 0.5 per cent.

 

The Bank has kept rates at that level since 2009 to provide an emergency stimulus to the weak economy.

But the UK is recovering, and by around 2017, Bank rate will settle somewhere between 2 and 3 per cent, Mr Carney told MPs.

“When the time comes — a welcome time — to raise rates, we expect it to be gradual, and the degree to be limited,” he said.

Low rates have hammered savers who rely on cash investments for income, but made it much cheaper for homebuyers and others to borrow.

House prices are already growing at record levels, and market activity generally peaks in the summer months.

The imminent end to historically low rates may leave would-be homebuyers having to consider whether they will still be able to afford their loans when borrowing costs rise.

Higher house prices could force borrowers to take on ever-larger debts, potentially leaving “a large number of households in vulnerable positions,” Mr Carney said.

Industry calculations suggest that an increase of 2.5 percentage points on a typical £150,000 repayment mortgage would push up monthly payments by around £230 a month.

For interest-only mortgages, the rise would be even steeper. The cost of servicing an interest-only loan that tracks the Bank rate plus 1 per cent would jump from £188 a month to £500.

Nationwide, one of Britain’s biggest mortgage lenders, said last month that the long period of low rates had left a generation of house- buyers with no experience of higher borrowing costs, leaving some at financial risk.

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