The reality, however is that for most of us ordinary folk - and small business owners, the impact will be relatively tiny - and here is why:
THE ABSOLUTE WINNERS: Absolute winners from rises in interest rates will be folk like my - and possibly your - parents. No debt, pension income and significant savings and investments.
For the last four years they have bemoaned the tiny returns from normal saving methods - rate rises will give them a real and visible improvement on their hard earned savings.
Except that, a large part of this group benefited from phenomena such as jobs for life and final salary pensions. Add to that the fact that they are statistically more likely to be savers than spenders so in reality they will have more money & feel better off, but this will have no actual impact on economic activity.
So that leaves those who are dependent on their savings and investments to live off - largely linked to sale of a business or property.
They will see and make a real economic benefit from interest rate rises.
THE ABSOLUTE LOSERS: In real terms will be those who took out tracker mortgages or overdrafts at a tiny rate above base - mostly prior to 2008.
Lets be fair, if banking madness provided you with a tracker mortgage at 1% over base - then a 0.5% rise in base rate will be 33% increase in borrowing costs - which looks like a lot.
similarly with business overdrafts arranged during these heady times.
Except that: Overdrafts are renewable annually, and repayable on demand. Coupled with the fact that banks are under huge pressure to remove overdrfats there are actually very few of these 'silly rate' overdrats remaining, most having been commuted to term loans (or simply withdrawn).
Best advice is that your principal mortgage should be on a repayment basis and within your means. Whilst rate rises will impact on tracker mortgages the relative impact will be less in the context of overall payment.
Which leaves the real impact on those who are borrowed to the hilt on tracker mortgages - many of which are on buy-to-let properties. The good news is that property prices have risen and BTL property is a liquid asset..
ONE TO WATCH: The rise and success of crowd funding is a direct result of poor returns offered by mainstream investment products.
In an environment where your State-guaranteed investments will struggle to return you 1.5%, it is tempting to take a qualified punt at 6% on a crowd loan.
When that guaranteed rate rises to 3 or 4%, the return from the crowd - with attendant risk - wil seem less inviting. It is only a guess, but my view is that crowd funding will be one of the bigger losers of rates rise significantly.
AND THE REST OF US? The biggest growth in the lending market is from outside the banks - not crowd sites (they are a relatively tiny sector), but private enterprise who use banks as wholesalers and monopolise lending niches.
These companies have 3 core cost centres - funding cost, bad debt and admin/delivery.
Surprisingly, wholesale money costs are fairly static - put in perspective during my career I have seen base rates between 0.5% and 16% - in this time wholesale funding costs have not varied by more than 4%.
Bad debt, meanwhile has obviously risen during the recessionary period - which means that this - dominant - sector has actually been expensive in relation to base rates.
With recovery comes lower bad debt and more competitive wholesaling - which means that cost of funding could actually drop as rates rise.
For those seeking mortgages, the majoroty are offered on fixed rate - the rate fixers have been anticipating and budgeting a rate rise for the last 2 years.
SO, IN CONCLUSION: Unless you are struggling with an interest only tracker mortgage, or were lucky enough to retain a base-linked overdraft, frankly the relative impact of rate rises will be tiny - so relax and business as usual!
ABOUT:
Mark Jones has spent 25 years in the commercial lending business
His aim is to be blunt but helpful in his advice on funding matters.
Call him on 07932 075 754
or email
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