Cost Of Loans Could Rise Dramatically August 27th, 2010
With the Bank of England Base Rate of interest at an all time low of just 0.5 per cent at the moment and remaining at that level for the past eighteen months, many borrowers are currently enjoying cheap loan repayments and in some cases have become complacent about the cost of their loans.
But a new report from a UK think tank has warned that it is quite possible that the base rate will have to be increased to around 8 per cent within the next two years, if the Bank of England is to stay in control of inflation.
The report from The Policy Exchange warned that although the UK could well suffer a double dip recession, this would be followed by a period of intense growth, which could push inflation up to around 10 per cent, forcing the Bank to increase interest rate on loans in order to combat this.
This could have a crippling effect on the finances of many individuals in the UK with outstanding home owner loans, currently on low loan rates. An increase of 7.5 per cent in interest rates could mean a difference in monthly loan repayments of around £625 per month on a loan of £100,000.
Although many individuals are currently enjoying the extra money in their pockets at the moment due to cheap loan rates, they should focus on repaying as much of their loan debts whilst interest rates are cheap, in order to try and avoid an expensive time in the imminent future.
Andrew Lilico of The Policy Exchange warned that if borrowers did not reduce their loan debts quickly, the Bank of England may be forced to keep interest rates low in order to avoid massive loan defaults.
Whilst this may seem like good news, it would have the eventual effect of pushing inflation up to possibly 20 per cent, with even worse eventual consequences for those with loans.