The Bank of England interest rate has stayed low for many years now, much to the joy of mortgage holders (though not savers), but there have been whisperings about an increase recently. While nothing concrete has been confirmed, here we look at how you might prepare for a rate rise…
Interest rate worries
For those of us who had mortgages in the 1980s and 90s, the past couple of decades have probably seemed particularly uneventful in terms of mortgage payments. In fact for older homeowners who can remember the bad old days when the interest rate rose over 13% (1985), the fact that it has stayed at a paltry 0.1% for the past 18 months is probably a thing of wonder.
It has actually been more than a dozen years since the rate even rose to the heady heights of 1%. So with the premise that what comes down must go up, talk among those in the know has been that there will be an increase. In fact just a couple of weeks ago, it seemed almost certain that a 0.15% increase was on the cards. As it happened, the Bank of England decided not to approve an increase, but with the rumblings continuing, it does make sense to make sure you are prepared should you be faced with any kind of rate rise.
Below we breakdown the things for you to consider.
If you have a tracker mortgage (which around 850,000 homeowners in the UK do), which charges interest in line with Bank of England rates, your mortgage repayments will increase. However, experts have calculated that for the average mortgage holder, with a standard variable rate (SVR) product, payments would go up by about £16 a month and £26 a month for a tracker mortgage holder.
If a monthly rise of this size is going to be a struggle, now is the time to start planning to make allowances for it. It’s good practice to check your budget every so often, and now is as good a time as ever. Take a hard look at your outgoings, ensure that you are not paying Direct Debits on subscriptions you no longer want or need, and identify where you could cut back to allow for the extra payment costs should you need to.
There are around 1.1 million homeowners with a standard variable rate mortgage, which can be changed at any time by their lender. Your payments could also increase. Again, if you are at that rate because your fixed rate ended and you haven’t got round to sorting out a new fixed product, now’s the time to get this done!
For the majority of homeowners, who are on fixed-rate deals, a rate rise will not affect their repayments at all – however, if you are nearing the end of your deal, seek advice now on your next mortgage product, so you are not caught unawares.
For those of you who are mortgage prisoners – stuck with your present deal because your financial circumstances have changed – this should be the incentive you need to find out if you can get help, before you are not only stuck with a more expensive product but hit with rate rises. Find out more about how to escape from mortgage prison.
The Bank of England reviews the interest rates every six weeks, so there is no need to panic. However, if you have any concerns, it makes sense to have a discussion with an independent mortgage adviser sooner rather than later, so that you’re prepared.
Also bear in mind that the increases are likely to be small – you’re unlikely to see jumps of 1 or 2% at a time, so making some small adjustments in your financial planning should be all that’s needed to keep you on an even keel.
In fact, being prepared is the name of the name of the game. This is why we recommend that our clients undertake some cashflow forecasting which will help you identify when you might have more demands on your money, so that you can plan ahead and not be surprised by large outgoings. View our guest blog about financial planning on the MyBump2Baby website.
For some people it may be worth remortgaging, even if they have to pay a penalty fee for leaving an existing product early. But this is probably going to be an unusual case, as exit fees are likely to be far more than any suggested increases. But if you are worried, it’s worth having a discussion with an independent advisor to see what your options are.
Finally – and we’ve said it before – don’t panic! Being in control of your finances is an important step in ensuring you protect your mental health. So rather than worry about what might happen, have a discussion with a financial expert, who can help you make the right decisions.
If you would like to discuss mortgages, interest rates, cash flow forecasting, financial planning, or any other financial matter, J Finance will be happy to help. Please contact us without obligation.
Established in Berkshire in 2004, J Finance Ltd is one of the leading financial planning companies in the area. We serve clients across England and Wales. If you would like to discuss this subject or any other financial matter, please contact us on 01635 521 300 or email firstname.lastname@example.org.
YOUR MORTGAGE IS SECURED ON YOUR HOME. THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.