It was announced yesterday that base rate would remain on hold at 0.5% for a further month, marking the sixth anniversary of being at its record low. Rates were cut to this level on 5 March 2009, and in all likelihood, things will remain this way for the next few months – but it won't last forever. Base rate will rise eventually and mortgage rates will follow suit, but the question is, are you ready for it?
According to research from The Money Charity, many people could be in for a shock. Their analysis of official data found that there have been 1,762,400 first-time buyers since July 2007, the last time the Bank of England increased base rate, with more than 1.1m of those having bought their first property since the rate fell to its record low in March 2009.
This means that over 1.75m mortgaged households have never experienced an interest rate rise or seen their repayments increase, with many having first purchased their home with the help of record low mortgage rates. This means they could be at risk of significant financial shock when interest rates rise, which unfortunately for borrowers, they're bound to do.
Their calculations highlight how much repayments could rise. The average rate for new mortgages taken out in January this year stood at 2.81%, meaning a £150,000 mortgage would have monthly payments of £697. But, in September 2008 typical rates were as high as 6.09%, equating to a repayment of £975 – and there's no reason why rates can't return to these kinds of levels in the future.
Michelle Highman, chief executive of The Money Charity, commented: "Recent low interest rates have been great for homeowners with variable rate mortgages and new buyers, but they won't last forever.
"No-one knows when interest rates will rise, but when they do, mortgage rates won't be far behind. The 1.75m households who've never experienced an interest rate rise could find themselves in for a nasty shock. And even those who've had mortgages for longer might have got used to their payments staying the same. Before rates rise is the perfect time to get ahead of the game and work out what you can afford, and where you could change your spending habits."
So, isn't it time you prepared yourself for the inevitable? If you've got used to your repayments being low, it's time to start thinking about what happens when they increase, and there are several things you can do to prepare yourself.
The first thing you'll want to do is take a cold, hard look at your budget, and see if there are any areas that could be cut back on. Not only will it mean you'll save money now, but you can be safe in the knowledge that when your repayments go up, you'll be able to cover them.
If you have the cash available, consider overpaying your mortgage to really make the most of low rates. Most providers of fixed rate mortgages will let you overpay by a certain amount, typically up to 10% of the outstanding balance, while variable rate mortgages have no such restrictions, so you have the chance to significantly reduce your loan size.
A lower balance means you could switch to a lower loan-to-value and will have lower repayments as a result, and you could pay your mortgage off sooner – it's win-win! Consider using the money you save from budgeting to make extra repayments, or if you've got savings stuck in an account that's paying lower rates of interest than you're paying your mortgage, it could be worth using some of that money to pay off more of your loan instead.
If you really want to beat the rate rise, why not remortgage to a long-term fixed rate? The long-term market has come into its own over the last few months, with five-year and even 10-year deals being readily available, giving you repayment certainty for up to a decade! It could be a great way to ensure you don't get a financial shock when rates rise, and as long as you make sure the deals are suitable – check that they're portable, for example, should you want to move home in the next 10 years – you could get a record low rate that'll stay that way for the long term.
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