Last week, Governor of the Bank of England Mark Carney hinted that base rate could start rising around the turn of the year. This would inevitably lead to mortgage rates following suit, effectively bringing the run of record low rates to an end, but the question is, could you cope with it?
Mortgage rates are intrinsically linked to the Bank of England base rate, so when base rate eventually rises, so will mortgage rates. While this won't have an immediate effect on borrowers with a fixed rate deal, those who are on variable rates – which can rise or fall at any time – will soon notice the difference.
Essentially, if your mortgage rate increases, so will your repayments. Depending on your mortgage balance and current rate, your repayments may not rise too much to begin with, but they'll still be higher. It could be particularly difficult for those who are already struggling to pay their bills, as Gillian Guy of Citizens Advice commented: "Historically low interest rates over the past six years have made it easier for people to manage their finances. A rise in rates will make things harder for those already struggling, and push those who are just about managing over the edge.
"Our evidence shows that one in five homeowners will fall into arrears when interest rates rise, [so] households need time to adjust to an interest rate increase. To limit the pressure on families' budgets, any rises in interest should be slow, steady, and come with plenty of warning. Access to money and debt advice will be essential to help prevent large numbers of people falling into problem debt."
There could be difficult times ahead for some borrowers, but that's not to say that rates will rise to extortionate levels in the space of a few months. The Bank of England has repeatedly said that any increase to base rate will be gradual, which hopefully means that mortgage rate rises will be just as measured, as will the impact on borrowers' wallets.
This means that there shouldn't be any immediate panic, but the fact remains –mortgage rates will rise at some point, as will your repayments, so if you don't want to get an unnecessary shock, it's time to take action.
Those on a variable rate mortgage may want to start comparing fixed rate deals, but you'll want to act fast. Mortgage rates won't stay this low forever, so by opting for one of the top fixed rate mortgage deals now, you can take advantage of the record-breaking offers currently available to fix your repayments for two, three, five or even 10 years, offering a kind of repayment certainty that can be invaluable in times when you don't quite know what rates are going to do next.
Those who are on their lender's standard variable rate (SVR) stand to benefit even more. SVRs haven't reacted in the same way to the low base rate environment and can still be as much as 5% – Moneyfacts' figures show that the average is 4.84% – so by remortgaging to a low fixed rate deal, you could save thousands.
It all comes down to your own personal circumstances and financial situation. By stress-testing your finances and factoring in the possibility of a rate rise in the not-too-distant future you can be sure that you wouldn't struggle, and if you can, why not consider overpaying?
Hopefully you'll be benefiting from a low mortgage rate and low repayments, so by paying off a bit extra each month, you can benefit for the long term. You have the potential to clear your mortgage sooner, and even bringing down the balance in time for your next remortgage can make all the difference – the lower the balance the lower your LTV will be, and that means you'll still be able to benefit from cheap mortgage deals. Whatever you choose, start considering your options now, and hopefully any rise to base rate won't have a negative impact on your wallet.
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.
Moneyfacts.co.uk will, like most other websites, place cookies onto your computer’s
hard drive. This includes tracking cookies.