Raising interest rate will hit properties hardest

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Britain's record growth in the service, manufacturing and retail sectors may lead to an increase of the interest rate two quarters earlier than previously expected. If it happens, homeowners and tenants could take a hit to their bank accounts.

The British Chambers of Commerce (BCC) expects the Bank of England to raise interest rates to 0.75% in the first quarter of 2015, and has upgraded its growth forecast from 2.8% to 3.1% for 2014. This would be the first annual growth exceeding 3% since 2007. The UK's strong economic performance is the result of rising confidence, according to Katja Hall, the deputy director general at the Confederation of Business Industry (CBI). Of the 726 businesses in a CBI survey, 35% said activity increased in the three months leading to May. This is the highest figure since records began in 2003, and exceeds the 25% in April of this year.

Charles Bean, deputy governor at the Bank of England, has said any increase in interest rates will be in "baby steps", possibly reaching 3% in three to five years. While a higher rate will increase the cost of borrowing and raise the cost of mortgage interest payments, it would be welcome news for savers as their cash would grow quicker.

The Royal Institution of Chartered Surveyors (RICS) found that house sales are at their strongest levels since 2008. House prices increased an average of £17,000 over the past 12 months, and wages an average of just £417 in the same period. Many new home loans are four times the borrowers' incomes. A rise in interest rates could cripple disposable income as people are forced to pay more to keep a roof over their heads. If interest rates rise to 3%, a £150,000 repayment mortgage could see monthly payments increase by £230 a month, while an interest-only mortgage on a 1% interest rate above the Bank rate would move from £188 to £500 a month.

Any increase on mortgages is likely to be reflected in tenancy rates too, otherwise landlords could lose their profit. However, raising rent could force tenants out and leave the owner with an even bigger payment burden - a scenario that could have serious consequences for those who opted for Buy to Let as a retirement plan.

Deputy Governor Charles Bean noted that"if there's signs that banks are making loans [available] to borrowers who may not be able to repay or we have doubts about... whether those households will be able to keep their consumption up if they borrow a lot, then they are reasons why the Bank's financial policy committee might want to take some action to rein things back a bit. "

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