The threat of rising mortgage rates is constantly looming, and on a small scale they're already starting to creep up. But what would happen if – and when – they have more of a dramatic increase? Would you be able to afford it? Research suggests that a lot of homeowners would struggle, which is why it's more important than ever to be prepared.
The research, conducted by Experian, found that the typical homebuyer underestimates their mortgage payments by as much as £500 per month – and this figure could rise substantially if rates start edging up. Setting their budget too low to begin with could not only cause a shock when they make their application, but in the future it could leave them seriously financially stretched, particularly when many don't have much disposable cash left over.
In fact, the typical Brit has just £371 left over each month for discretionary spending, and should interest rates rise they'd have just £100 left to their name – unless they cut back on their outgoings. A worrying 35% even admitted that they'd find it hard to make ends meet should their mortgage become more expensive than they'd budgeted for, with the figures clearly showing the potential for homeowners to be financially squeezed.
So, what can you do?
They key, as with so many things in life, is to be prepared. You need to make sure your finances are in the best shape possible before you start making that application, because complacency simply won't cut it.
Don't be like some aspiring homeowners – Experian's research also found that 19% don't plan on preparing their finances at all with 18% only planning on preparing a month in advance, while just 23% checked their credit report in the six months prior to making an application – and 34% admitted to not checking their report at all before applying for a mortgage.
Given that new affordability rules are now fully in force, you simply can't afford to be complacent. Peter Turner, managing director of Experian Consumer Services, commented:
"These findings show just how important it is to get your finances in the best shape possible in advance of a mortgage application. It's not just a case of making sure you're accepted; it's a case of using your finances to land the best rate.
"Ensuring that your mortgage application gets the highest credit score possible can make a difference of hundreds of pounds a month, and thousands over the course of a mortgage's lifetime."
You'll want to cut back on discretionary spending as far as possible as well as trying to reduce your current credit commitments, because lenders will expect a breakdown of where your money goes each month. You'll need to show them you're a responsible, credit-worthy individual who can comfortably afford the repayments, and show them you could do so when rates rise too.
You'll need to do a bit of forward planning and plenty of research before you take the plunge. Checking your credit score is a must – as is making any adjustments where necessary – and know your budget inside out to determine what you can reasonably afford. Then it all comes down to building up that all-important deposit, and the combination of a suitable deposit and a healthy financial situation should help you secure that affordable rate – and ideally help keep your repayments in check.
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