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Could rising interest rates put you in arrears?

Could rising interest rates put you in arrears?

Category: Mortgages

Updated: 03/06/2014
First Published: 03/06/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The ongoing threat of rising interest rates means a lot of borrowers could be worried about their future repayments, particularly those on lower incomes. It's a concern for the industry at large too, and in fact the UK Asset Resolution (UKAR) has issued this stark warning – if interest rates rise, mortgage arrears could follow.

UKAR, known as the UK's "bad bank" as it was established to bring together the failed Bradford & Bingley and Northern Rock, gave this warning in its results announcement for the year 2013/14. Despite revealing that the number of mortgage arrears has reduced by 39% to 15,483 since December 2012, this was largely led by the low interest rate environment – therefore when rates start to rise, it could lead to a reversal of fortune.

The report stated: "The signs are that the UK economy is continuing to recover. House prices have increased faster than expected over the past 15 months which, combined with continued low rates of interest, is good news for our customers and has driven increased redemption activity.

"However, despite the more positive conditions, many households continue to be under financial pressure. This, together with the prospect of interest rate rises and higher mortgage payments, will be a concern for many of our customers."

UKAR anticipates that interest rates would only rise slowly, however feedback from their customers suggested that a lot would struggle to maintain their repayments if rates were to rise significantly. Happily, though, the firm is making provisions to help customers plan ahead and ensure long-term affordability of their mortgage, putting them in a better financial position.

However, despite UKAR offering this kind of help, some borrowers – and those with other providers – could still be concerned. It's hoped that the stricter affordability checks following the Mortgage Market Review (MMR) will help future borrowers avoid the prospect of arrears, but those who are already in a mortgage agreement might be worried about what the future holds.

If you're one of them, it's more important than ever to be proactive and prepare for the inevitable. There are clear indications that interest rates are going to rise in the near future – the Bank of England's deputy Governor, for example, recently said he expects base rate to gradually increase from its current 0.5% to settle at around 3% in the next few years – so the key is to make sure you're ready for the impact on your mortgage repayments.

Overpaying now could be a great option, thereby reducing the total balance and potentially meaning you can switch to a lower loan-to-value – and therefore a better rate – when it's time to remortgage. Fixing to a longer-term deal could also be an option, such as a five-year term rather than a two-year, as that way you'll have some certainty over your repayments for the next few years and wouldn't be pushed into a higher rate too soon.

Then it all comes down to saving as much as you can, as a decent emergency fund could be a great financial buffer should you find yourself struggling in the future. If you do find it difficult to make the repayments, make sure to speak to your lender as soon as possible to discuss the options, and hopefully rising interest rates won't leave you in arrears.

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