What Do Interest Rates Mean To You?

Posted by Allison on 4 April 2009, 10:07

If you tend to keep up with what's going on in the world, you may well be one of those people who get a little worried when the talk on the television turns to one of interest rates. 

What if they go up?  What will that mean for you and your family?  And yet at the same time another group of people are rejoicing and hoping that they go a little higher so they can really benefit from it.

Could this actually be possible?  Could there be such a divide among people in this way?

Interest rates are closely tied in with the economy of a particular country.  No matter where that country is located or what currency it uses, its interest rates can profoundly affect its residents.  This is why the people in charge of setting interest rates in each country have such an unenviable job.  Everyone is looking at them and waiting with bated breath to see what they do.  Will they raise interest rates or lower them?  Will they stay the same?

What's more, it isn't even a case of raising or lowering them by a whole percentage point that matters.  If that happened it would probably be catastrophic for the country concerned, not to mention the knock on effect it would have on other countries.  We are talking about a mere quarter of a point here, which might not sound like much but it is the meaning that has which has the big effect on what happens.

The fact that interest rates are going up by any amount – even if it is only by a quarter of a per cent – can start everyone speculating as to what will happen the next time the interest rates are looked at.  Will they go up still further?  How will the economy cope as a result?  Was that the right decision in the first place or not?  It's small wonder that no one particularly envies the people responsible for their jobs.

But how do interest rates affect you and I?  We can certainly feel the effects of rising interest rates, since the banks and building societies pick up on them and use them to raise their own rates.  This means that even the smallest rise in interest rates can mean extra money to pay on our mortgages, which is one of the reasons why everyone starts to worry at the thought of them going up too far.  It is quite clear that we can feel the difference in our pockets.

But there is a group of people who don't mind the interest rates going up – and that's the savers.  These tend to mostly be young people who aren't yet on the housing ladder and who might still be living at home, and people who have already paid their mortgage off.

There was a period back in the early Nineties when interest rates were hovering around the 13% mark.  This might seem unthinkable now but who is to say they won't soar back up there yet again?  This was a great time for savers, who received a great amount of interest on everything they saved and didn't have to worry about the huge increase in their mortgage payments.

But for those who owned their own houses it was an incredibly troubling time.  Many home owners were praying for the rates to go back down to a more reasonable level – even 10% (which is still much higher than what we have at the moment) would have been a godsend.

Some people are worried that Britain is heading for a recession now, similar to the one that was in full force when those huge interest rates were in force back then.  Maybe that is one of the reasons why everyone is keeping such a close eye on what the interest rates are doing now, since they don't want to see signs of a repeat of what happened back then.

There are of course other factors which tend to trigger a recession as well, and the interest rates are only a small part of that.  But for those people who have been tempted by how easily available credit has been in the past few years, they would be forgiven for watching every newscast to see whether there is any sign that those interest rates are going up even by a small amount.  Borrowing until you are in debt right up to the hilt is never a good idea, since you have no available breathing space if rates do go up.  And you can be sure that sooner or later they will do exactly that.

So what do those rates mean to you?  Do you think about how much more interest you will get on your savings – and how much further away you are from hopping on the bottom rung of the housing ladder?  Or do you think about the surplus cash you have left each month after the bills are paid and wonder how much higher those rates will have to go before that surplus cash runs out?

Interest rates might seem boring, but in fact they have a huge effect on us which we gradually become more and more aware of as we get older.  Anyone who was a child during the last recession might not have been aware of what was going on, except through the problems their parents may have gone through.  Any mention of interest rates and how high they were would have been met with a blank stare.

Perhaps the most frustrating thing for the public is that we can do nothing but sit and wait to see what will happen next and how a rise or fall in interest rates would affect us personally.  A fall would be better than a rise, but as we have discovered things are far more complicated than choosing where the rates will go next.

One thing is certain though – we don't want a repeat of the early Nineties.