Are you worried about an interest rate rise? Over half of borrowers would struggle with a 1% rise in the next year and so the Money Advice Service tells us how to avoid potential pitfalls
We’ve had six years of a base interest rate of 0.5%, meaning lower mortgage repayments for many homeowners. If you’ve bought your first home in this time you won’t have seen the years when the base rate was between 4% and 8%, and even as high as 15%. We’re unlikely to see the levels soar to these heights, but new research has shown over half of borrowers would struggle if rates were to rise by 1% in the next year.
One in ten people asked by the Building Societies Association (BSA) worried they would have serious financial problems if interest rates increased. One in seven felt they could just about keep up, and a quarter of people said they would struggle from time to time. This adds up to a huge number of home owners whose budgets have little room for extra costs.
Of course, we’ve heard news that an interest rate rise is around the corner for over a year now without it happening. But it could happen any time, and since we don’t know when they’ll go up (or even down) and by how much, it’s pays to work out your situation before a change.
Can you afford an interest rate rise?
If you have a fixed term mortgage, it’s unlikely you’ll be affected until that period ends, but if you’re on a variable or tracker you’d probably pay more soon after a rate change.
Working out what an increase will do to your repayments is a great first step, and you can use calculators such as the one at the bottom of this article to do it.
Remember this is the base rate that is increasing. Your current mortgage rate will be higher so add increases to that figure to work out what you’d be paying.
Try upping your rate by a quarter of a percent, then a half and so on because it’s expected any increase would be in small increments like this. But talk has been around interest rates finally settling between 3% to 5%, so work out what that would do to your repayments too.
Finding extra money to cover larger mortgage payments
The BSA survey also asked people how they’d cope with higher repayments. One in four said they’d need to cut back on general spending, while one in five felt that included essentials.
If you can, don’t wait for a change in rates to happen before you look at where you can cut back. Reducing your spending as soon as you can means you can build up savings to help if you think you may struggle.
Taking action now to lower the size of repayments
A smaller number (5%) said they’d try to remortgage to a cheaper deal, while others (also 5%) said they’d overpay a lump sum to reduce what they owed.
Both of these are well worth considering before a rise happens.
Using savings – or extra money you find in your budget now – to pay more into your mortgage while the rates are low will reduce the overall size of the mortgage. In turn, your monthly payments will also be lower because there’s less to pay off.
You could also find out if you’ll save by remortgaging. You might be able to change the rate you are on by taking advantage of the really low deals currently available. Or you could find an increase in your home’s price gives you a better loan-to-value (LTV) and access to more mortgage deals.
Make sure you watch out for any penalties stopping you overpaying or ending your mortgage deal early because they could end up costing you more than you save.
This article is provided by the Money Advice Service.