Mortgage rates are still in their run of being at record low levels, giving homeowners the chance to benefit from reduced repayments and, potentially, the chance to overpay and clear their debt sooner.
However, this won't last forever. The Bank of England has given clear indications that a rise to base rate could be on the cards, perhaps as early as 2015, and that means mortgage rates could start to rise accordingly. That's why homeowners are being urged to prepare for the prospect of higher mortgage repayments, because with budgets already being tight it could put an additional and unwelcome squeeze on household finances.
How much could payments increase by?
The exact figure will always depend on your individual circumstances, including your mortgage amount and the rate you're able to find, but research from Barclays has estimated that the average household could see their mortgage payments rise by around £252 per year.
This is based on conservative estimates that would see base rate increase three times over the next 23 months, with the Centre for Economics and Business Research predicting a figure of 1.25% by the end of 2015 – a considerable increase on the 0.50% as it currently stands. However, under the "drastic" model, which would see base rate at 1.75% by December 2015, Barclays' Financial Flexibility Report estimates that average mortgage payments could rise by as much as £576 per year.
That extra amount could put huge pressure on already struggling households, with the report finding it's those on the lowest incomes that are most at risk. Mortgage repayments were found to take up over 50% of monthly earnings for the 20% of households on the lowest incomes, and this proportion could rise if rates go up faster than wages. Meanwhile those in London could face the biggest increase to monthly payments, with the average cost of a mortgage increasing by £384 per year based on the conservative scenario – and £924 on the drastic model.
Make sure you're prepared
Ideally any rate rise shouldn't come as too much of a shock – the Financial Conduct Authority is even urging lenders to proactively warn borrowers that their bills are set to rise, particularly those who might have trouble making repayments, and should try to help them accordingly – but the key is to be prepared.
Andy Gray, Barclays managing director of mortgages, said: "In the face of a rise in mortgage rates and in the cost of living, it is vital for homeowners to review their current situation and get advice as to what their next mortgage step should be – so they remain financially flexible in the face of rate rises to come [which] will undoubtedly squeeze some homeowners.
"The overarching insight is that rates will rise in the medium term and so mortgage customers should be aware of the impact of any rises on their finances and review their mortgage arrangements accordingly. With some clear advice and greater planning homeowners will be better equipped for any financial changes and get the right mortgage product for them."
What can you do?
Not only is it important to review your current situation (making sure to speak to your lender if you've got any concerns), it's vital to properly plan for the future and budget accordingly. Reigning in your spending could well be a necessity to make sure you've got enough left over each month to cover any impending rate rise, and ideally you'll want to start putting aside additional savings so you've got an added financial buffer.
You might even want to overpay your mortgage if your monthly budget allows. It's a great time to take advantage of low rates, and even overpaying by a hundred pounds or two each month could make a huge difference and could drastically reduce the amount of interest you'll have to pay in the long run. Look at your other borrowing too, and if you've got any loans or credit cards try to pay them off before you need to get a new mortgage – if you're a reduced credit risk, you'll find it easier to secure cheaper rates.
Then, of course, it'll be time to compare mortgage deals. When rates start to go up you'll want to make sure you've got the most competitive deal possible, and in the meantime you might want to remortgage to a fixed rate to avoid the possibility of paying extra too soon. Make sure to check out our mortgage best buys so you can save as much as possible before rates start to go up.
Compare the best mortgage deals in our best buy charts
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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