I read in the news recently that the CBI predicted that interest rates are likely to be at 2.5% by the end of 2012, and the accompanying rise in mortgage costs would potentially force many 100,000s of home owners into negative equity. I am not an economist, but I find this type of reporting unnecessarily alarmist and illogical. The number of new mortgages issued over the last two years while we have very low interest rates has been much lower than the number of supposed defaulters waiting around the corner. Presumably over the last couple of years, many householders have also taken advantage of locking into lower rates at some point. I therefore fail to see why a raise to 2.5%, which in percentage terms is of course a huge increase, would have such a dramatic effect, specifically on negative equity, since in absolute terms mortgages even at those rates will still be relatively cheap, and while there will inevitably be hardship along the way for many people, for the majority of mortgage holders rates even then will still be more affordable than they have been for a generation.
My own hunch is that this period of unprecedented low interest rates and hence lower mortgage costs has provided a welcome shield to homeowners to offset the higher costs of living elsewhere…