How Will a 1% Mortgage Interest Rate Affect You?

Reports in the news this morning that mortgage repossession orders made by courts in England and Wales are at a five-year high, shows yet again the financial strain homeowners are under.
Repossession orders have increased by 22% in a three month period, when compared with the same period in 2005. Although this doesn’t mean that the homes are actually repossessed, it does mean that creditors are making an application for eviction so that they can get their hands on the money owed. Hence the reason you always receive a warning with any mortgage advertisement: “Your home may be repossessed if you do not keep up the payments on it” is required to be state at the bottom of loan adverts.
The Bank of England is expected to raise rates again, possibly as soon as this coming week and some economists are suggesting that the rate will have to rise 6% next year to keep inflation in check.
Time to tighten your belt?
Experts fear the debt situation could get worse.
"The likely increase in interest rates this month, plus the possibility of more monetary tightening in 2007, make it all but certain that the numbers entering the repossession process will increase” says David Stubbs, senior economist at the Royal Institute of Chartered Surveyors.
And that’s just a review of the mortgage situation. Those without a mortgage won’t escape lightly. Credit cards rates will increase too. This will, of course, impact on the lives of many more people.
What do that mean to you?
Every credit card, variable rate loan and variable rate mortgage will increase. Can you sustain a 1% increase?
Check this out:
Melissa lives with her partner Jeff. They don’t have the best credit history so have to pay more for their loans. They have a self certificated mortgage so pay a little more than high street rates. Melissa has a number of debts, which are broken down as follows:
220,000 Joint Variable Rate Mortgage with her partner
60,000 Car Loan at 11.9% £1092.11
15,000 Fixed rate loan, 5 years
13,500 Credit Card A – 15.9% variable Rate
5,400 Credit Card B – 14.75 variable rate

Here is the breakdown of the outgoings and what would happen with a 1% increase. I have listed the Loan Amount Borrowed, the Current Interest Rate, followed by the Min Mthly Payment and a 1% increase and finally the extra amount of money Melissa would to use to pay off her debts each month
Mortgage: 220,000 at 5.6% interest rate is 1380.10 per month. It would rise to 1516.92, thus 136.82 per month would be needed
Car Loan: 60,000 at 11.9% interest rate is 1092.11 per month. It would rise to 1127.03 , thus 34.92 per month would be needed
Loan : 15,000 at 5.6% interest rate is 287.21 per month. It would rise to 294.20 , thus 6.99 per month would be needed
Credit Card A: 13,500 at 15.9% interest rate is 183.46 per month. It would rise to 19.03, thus 10.57 per month would be needed
Credit Card B: 5,400 at 14.75% interest rate is 68.51 per month. It would rise to 72.75 , thus 4.24 per month would be needed.
Total Extra Money that Melissa would need to find with a 1% increase is 193.54

193.54 may or may not seem like a lot. Some readers will recall the early 1990’s when mortgage rates hit 15%. At 12% Melissa & Jeff's mortgage alone would be £2369.99 per month (a rise of £989.89 based on the current mortage rate of 5.5%)
By the way, many people have an “Interest Only” mortgage, which does mean the increase has less impact (for example, Melissa and Jeff’s mortgage would currently be £1026.66 and rise to £1210, which is 183.33 extra per month for just 1% increase)

For a good mortgage calculator go to:
http://www.bbc.co.uk/homes/property/mortgagecalculator.shtml