What will happen to you when interest rates rise?

Interest rates are currently at historic lows and there is no reason to believe they will rise in the short term, certainly until the economic recovery is secured.

But they will rise again one day, maybe as early as 2015 according to some commentators.

What will it mean for your personal finances when interest rates start to rise?

Some forecasting carried out by the Resolution Foundation has found that a relatively modest rate rise to 3% could result in over 1.1 million people seeing half of their disposable income spent on servicing debts by 2018.

Interest rates reaching 5% would result in two million households being in ‘debt peril’, the phrase describing those spending more than half of their household income on managing debts.

Commenting on the forecasts, Matthew Whittaker, senior economist at the Resolution Foundation, said:

“Even if we take a somewhat rosy view of how the economy will develop over the next few years the number of households severely exposed to debt looks as though it will double.

“But the levels of debt built up by families in the pre-crisis years are such that even relatively modest changes in incomes and borrowing cost assumptions produce significantly worse outcomes.”

Understanding the impact of interest rate rises on your family finances is an important part of Financial Planning.

While we do not offer mortgage advice at Informed Choice (we refer our clients to suitable specialists), we do consider a range of scenarios when building Financial Plans, including the impact of future rate rises.

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