Minutes from the Monetary Policy Committee (MPC) released yesterday (5 November) may have put off a rise to the Bank of England base rate for now, but this doesn't mean that this low interest rate environment will continue forever. However, it seems that many UK homeowners are blissfully unaware of what a base rate rise could mean for them and their mortgage payments, which could mean a nasty surprise in the near-future.
The jury is still out as to when base rate will eventually creep up from its record low of 0.50%, but it's fairly certain that a rise will occur within the next two years. This means that a typical homebuyer securing a two-year fixed rate mortgage today will have to deal with the consequences of a rise in mortgage payments when their fixed term comes to an end.
However, research carried out by eMoov.co.uk revealed that four out of 10 UK homeowners in their survey (39%) admitted that they were unaware of how much their payments would rise by if base rate increased by just 0.5%. This is a worrying finding, as it means that those on tight budgets may not be prepared to absorb the extra costs.
And these costs can be significant: eMoov.co.uk calculated that a borrower purchasing a home priced at the national average (£209,383) with a mortgage at an average loan-to-value (LTV) of 85% would be borrowing a total of £177,976. A two-year fixed mortgage deal for a term of 25 years priced at 1.85% would therefore equate to a monthly payment of £741. However, a base rate rise of 0.5% would increase these monthly payments by a staggering 5.9%.
For those with larger mortgages, this increase could be "catastrophic". For example, in London, where the average house price now tops £500,000, a 5.9% increase in mortgage rate would equate to more than £1,000 per year extra in mortgage repayments.
"The reality is that interest rates will rise eventually, despite Mark Carney's comforting words this week," commented Russell Quirk, founder and CEO of eMoov.co.uk. "A jump of £50 to £100 per month may seem insignificant to most, but for those really borrowed up to the hilt in order to get a foot on the ladder, it could potentially be catastrophic."
As a base rate rise materialises on the horizon, it's time to make preparations for its arrival.
If you have a fixed term mortgage, find out when it expires. If it's soon, you may want to think about fixing to another mortgage deal while the rates are still at all-time lows. A longer fixed term can give you certainty over your mortgage repayments, which can help you budget and plan ahead. This may also be a good idea if you are currently sitting on a tracker deal. Check out our best fixed rate and remortgage deals to secure cost-effective repayments.
If you are hoping to buy your own home in the near-future, you can insulate yourself from base rate rises by gathering together the best deposit you can. A larger deposit will mean that your mortgage repayments are lower, making your mortgage more cost-effective. A regular savings account can be an ideal vehicle for this saving purpose – it will encourage you to make regular deposits and build up a decent pot over the long term.
Whatever you do, don't rest on your laurels! A base rate rise will be making itself known some point soon, so it's up to you to be ready for it.
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