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What effect will interest rate rises have on your personal finances?

Economists are predicting that an increase in interest rates will occur in early 2015 but what effect will this have on the average household?

An interest rate rise will increase the cost of living for everyone with variable mortgages, overdraft, loans and credit cards.

With rising house prices and record low interest rates, this has meant that some people have been tempted to borrow more than they can afford.

Even if interest rates rise gradually, it could still come as a shock to those who have been enjoyed rock bottom rates for over five years. This may result in some individuals struggling to manage their finances.

A recent survey has shown that an interest rate rise is least welcome amongst the 35-44 age group with 35% saying they would be negatively hit by an interest rate rise, compared to only 13% of those aged over 65.

It has been reported that although the majority of British adults say they would not be materially affected by an increase in interest rates, a considerable number still feel they are set to lose out. For those who have variable mortgages, a 0.5% increase in interest rates could increase the cost by £60 per month on a mortgage of £100,000. This could have a significant impact on personal disposable income and will also have a big impact on consumer spending.

Interest rates have been at a record low for over five years yet personal insolvencies are on the rise again.  Between April and June 2014, 27,029 individuals entered personal insolvency proceedings, which is an increase of 5.1% on the same quarter in 2013 (this does not take into account other debt management processes). Of the 27,029 personal insolvencies, 14,571 of these related to Individual Voluntary Arrangements, which is more than at any point since 1987.I

t would seem that the increase is due to the fact that after changes to the law it has become easier for individuals to write off their debts.

If people are considering taking out a loan or applying for a credit card, they should consider the consequences of doing so as their ability to repay their debts may be effected by an interest rate rise. For those people who are already struggling to meet their monthly outgoings, it would be foolish to increase their borrowing at a time of an impending rate rise. People who are concerned about interest rate rises should start thinking about how they will manage the increased costs. 

The important thing to remember is that if an individual is faced with personal debt that they are not able to service, they should seek advice as soon as possible. There are several ways which an individual can manage their debts over a period of time, which need not result in them being made bankrupt.

At Portland we offer debt management advice and guidance to individuals in times of financial difficulties.

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