Interest rates could rise within months ending the era of cheap mortgages, the Governor of the Bank of England has warned.
Mark Carney told households to prepare themselves for a hike in the cost of borrowing at around the turn of this year.
He warned in a speech given at Lincoln Cathedral that with the economy recovering, wages rising and high numbers of people in employment, interest rates would have to rise to help control inflation.
He said: “The need for Bank Rate to rise reflects the momentum in the economy.
“It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and to a level in the medium term that is perhaps about half as high as historical averages.
“In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”
Carney said the historical long-term average of the Bank Rate was 4.5 per cent, suggesting the official cost of borrowing could be increased to 2.25 per cent.
But he added that shocks to the economy could easily affect the timing and speed of any interest rate rises.
Interest rates have been at a record low of 0.5 per cent since March 2009.
A 0.25 per cent increase in the cost of borrowing would increase repayments on a variable rate £150,000 mortgage by around £17 a month or £204 a year.
If the Bank Rate continues to increase to 2.25 per cent, households with a £150,000 mortgage would have to find an addition £126 a month or £1,512 a year.
Any increase in mortgage rates is likely to lead to a slowdown in activity in the housing market.
Strong house price rises in the past couple of years have led to affordability becoming stretched, with the typical property currently costing 5.25 times average earnings, the highest level since April 2008, according to mortgage lender Halifax.
There will also be concerns about the ability of some households to keep up with their mortgage repayments, although previous research has suggested consumers are prepared to cut back on other spending and even take on second jobs in order to keep up with their home loan.
Even so, Carney warned that if interest rates rise in line with current expectations by financial markets, half of homeowners with a mortgage would face higher repayments in a year’s time and three-quarters would see a hike in two years’ time.
Mark Carney told households to prepare themselves for a hike in the cost of borrowing at around the turn of this year.
He warned in a speech given at Lincoln Cathedral that with the economy recovering, wages rising and high numbers of people in employment, interest rates would have to rise to help control inflation.
He said: “The need for Bank Rate to rise reflects the momentum in the economy.
“It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and to a level in the medium term that is perhaps about half as high as historical averages.
“In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”
Carney said the historical long-term average of the Bank Rate was 4.5 per cent, suggesting the official cost of borrowing could be increased to 2.25 per cent.
But he added that shocks to the economy could easily affect the timing and speed of any interest rate rises.
Interest rates have been at a record low of 0.5 per cent since March 2009.
A 0.25 per cent increase in the cost of borrowing would increase repayments on a variable rate £150,000 mortgage by around £17 a month or £204 a year.
If the Bank Rate continues to increase to 2.25 per cent, households with a £150,000 mortgage would have to find an addition £126 a month or £1,512 a year.
Any increase in mortgage rates is likely to lead to a slowdown in activity in the housing market.
Strong house price rises in the past couple of years have led to affordability becoming stretched, with the typical property currently costing 5.25 times average earnings, the highest level since April 2008, according to mortgage lender Halifax.
There will also be concerns about the ability of some households to keep up with their mortgage repayments, although previous research has suggested consumers are prepared to cut back on other spending and even take on second jobs in order to keep up with their home loan.
Even so, Carney warned that if interest rates rise in line with current expectations by financial markets, half of homeowners with a mortgage would face higher repayments in a year’s time and three-quarters would see a hike in two years’ time.
But on a brighter note, he reassured borrowers that the
Bank of England’s Monetary Policy Committee would “proceed slowly”, and
that it would adopt a “feel its way as it goes” approach to increasing
the Bank Rate.
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