Interest rates go up, house values will fall

Homeowners are expected to face double squeeze over the next two years, as interest rate goes up by 600% and property value plummets. Latest studies show that to cope with the rising inflation, the Bank of England will have no other option than to increase the interest rate.

CBI Head of Economic Analysis, Lai Wah Co explained that homeowners with floating interest rate will see a change of fortunes over the next two years. Low interest rates has driven down their mortgage payments; this is now about to change.

Almost seven million homeowners will suffer a hike of almost £200 on their floating interest rate mortgages. Many are expected to face having their properties repossessed. According to the Financial Stability Report, produced by the Bank of England, Almost 66% of borrowers are on floating interest rate deals. It also shows that the figure is on the rise.

Currently, the interest rate stands at 0.5%; experts forecast an increase will take place as early as this spring. The rate will continue to rise quarterly by 0.25% until the 2nd quarter of 2012, after which, the interest rate will rise quarterly by 0.5%.

House prices are also falling, disappointing news for homeowners; NationWide, the UK’s largest building society, published figures, showing a fall of 0.3% in November.

The situation is aggravated by a forecasted increase on the overall cost of living. The Consumer Price Index (CPI) is expected to reach 3.8% in the first quarter of 2011. By the beginning of 2012, the CPI will have reached 5%, according to the CBI forecast.

‘The good news is, we didn’t have a double dip recession in 2010,’ said Tim Moore, an economist at Market research group. “However, high inflation is already hampering household finance. At the moment, there are no signs of recovery in this department. ”

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