With interest rates at an all-time low, it’s hard to remember what it’s like for individuals and for businesses living with high rates of interest.
If current interest rates were to rise, one of the ways in which people would most keenly feel the increase would be in their mortgage payments. Anyone without a large amount of equity in their home may find themselves trapped.
Of course, using a mortgage calculator, such as that available free, online at the Money Advice Service, to assess affordability is a good step, but many people don’t calculate the impact of potential rate rises on payments.
This situation would naturally have knock on effects in the wider economy. Homeowners with less disposable income, and behaving in a more conservative way, would mean less money in the economy and could have a significant impact, particularly on smaller, local businesses or those which focus on luxury or discretionary goods and services.
When the global financial crisis broke in 2008, interest rates were at 5% – not especially high. Even so, after banks started collapsing, the Bank of England very quickly made its first interest rate cuts.
With consumer confidence low and unemployment high (and rising), rates were ultimately cut to an all-time low of 0.5%. A programme of quantitative easing started and although recovery began, an ongoing nervousness about the sustainability of the recovery prevails.
Inevitably, alongside any economic crisis almost always runs a political crisis.
Take a look at 16 September 1992, also known as Black Wednesday. Interest rates were already high at 10%, but by the end of the day they had increased to 15%. Undoubtedly, the events of that day paved the way for Tony Blair’s Labour government and the monetary regulation system we know today.
As the Guardian explains, there was more than one reason for the events of September 1992, probably dating back to the doubling of interest rates between 1988 and 1989, and the subsequent recession. With unemployment rising sharply, many people struggled with mortgage payments.
In order to mitigate the rise, the government began to rapidly decrease interest rates until they were back down to 6% by early 1993. With home loans made easier to finance and consumers with more disposable income, the economy started a recovery.
After any period of high interest in recent history, governments have intervened in some way in order to bring down rates, or somehow increase affordability and disposable income of homeowners.
How quickly consumer confidence bounces back has differed – maybe depending on the period of time between interest rate hikes. While people can still remember the struggle of making high interest mortgage payments they are less likely to commit to large, challenging mortgages.
Many commentators are predicting another interest rate rise, heralding the increase in competitive fixed rate deals as potential indicators.