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Cost of debt about to rise?

By Matthew Plant - Financial specialist

24 August2010

Interest rates could rise to 8% by 2021, according to a member of a think tank - something which could greatly increase the cost of repaying mortgages and other debts.

As the Daily Mail reports, Andrew Lilico of the Policy Exchange has stated that the economy would `have to be able to tolerate interest rates of perhaps 8 per cent` as the Bank of England tries to keep inflation down to a reasonable level.

If the base rate were to rise from its current 0.5% to anything like 8%, this would have a big impact on people with tracker or variable-rate mortgages, as well as anyone looking for a new fixed-rate deal.

The monthly cost of repaying a mortgage debt could almost triple if the base rate increased to 8% - assuming lenders kept their `margins` (the difference between the official base rate and the actual rate on mortgages) the same, and assuming the individual was on an interest-only mortgage.

"For someone who`s carrying debt, stories about interest rates can make frightening reading," said a debt expert at Think Money, "but it`s important to realise how many different predictions there are in this kind of area. To name just two, we`ve had predictions in the last month that interest rates will be at 2.5% in mid-2011 - and that they`ll stay at 0.5% until 2014.

"It`s a serious matter, but there are so many factors involved that different analysts can easily arrive at different conclusions."

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Tags: debt, Daly Mail, cost of debt, base rate, tracker rate, variable rate

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