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Fears over mortgage rate rises – how to cope

Fears over mortgage rate rises – how to cope

Category: Mortgages

Updated: 26/09/2014
First Published: 26/09/2014

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 It is now over 6 months old so the content may be out of date.

There's no getting away from it – mortgage rates are going to rise. It'll be a huge shock for many borrowers, a lot of whom may have never known anything other than this low-rate environment, and there are fears that some could be in financial difficulty when rates start to creep up.

Research from the Building Societies Association (BSA) highlights this in more detail. According to their findings, 27% of those with a mortgage could find it particularly difficult when interest rates rise – 7% said they could be in serious trouble if rates and repayments increase as expected over the next three years, while 20% said they'd be in slight trouble. Potentially, that's a lot of people struggling to make repayments.

"These results indicate the sensitivity of people's monthly spending to changes in general household expenditure, indicating that as mortgage rates rise this could have a significant impact on economic recovery," said Paul Broadhead, head of mortgage policy at the BSA. "Many consumers are only used to a low rate environment which will change, and whilst most mortgage rates are not linked quite so directly to the base rate as they used to be, rates will rise as it increases."

The study also revealed what borrowers will do to prepare for rising interest rates – and some paint a particularly worrying picture for the future. While 39% would cut back on non-essential spending, such as holidays and eating out, 20% would need to cut back on essentials like food and clothing, and it's these kinds of sacrifices that are concerning. A further 9% would use their savings to cover the repayments – not ideal when we're all advised to have a healthy emergency fund – and 6% would be forced to move to a cheaper property. That's a huge sacrifice to make, and it could turn an already stressful situation into one that's even more emotionally-fraught.

Be prepared

Hopefully you won't need to take such drastic action when rates start to rise, but if you want to make sure of that, it's important to start preparing now. Planning ahead and having a clear idea of how you can manage your funds when your repayments change can make all the difference, and if you start making the necessary adjustments now, it won't come as such a shock when rate rises come.

Here are a few things you may like to consider:

  • Pay off a lump sum to reduce your mortgage. This will be a tool employed by 10% of those surveyed, and if you have the funds to do so it could be a great place to start. Paying off a lump sum now could reduce the overall balance of your mortgage, which could, in turn, lower your monthly payments when your rate changes.
  • Remortgage. When your fixed deal comes to an end, consider remortgaging rather than sticking with your provider's standard variable rate. There could well be cheaper deals to be found, so follow in the footsteps of 19% of BSA respondents and consider the alternatives.
  • Make a household budget. It's easy to think you're sticking to a budget, but unless you really look into it properly you could be spending more than you need to. Thoroughly analyse your monthly spending and see where any cutbacks could be made, and if you find that a lot of cash goes on non-essential spending, it could be time to make a few sacrifices.
  • Re-schedule your unsecured lending commitments. Having to repay other forms of debt could put an even bigger strain on the purse strings when your mortgage rate goes up. That's why you should look into making some changes now. If you've got a credit card, then consider shifting the balance to a 0% interest option and have a plan of how you'll repay it, and try to stop adding to the balance – if you cut back on credit now, it could well pay off later.
  • Build up your savings. Building up your savings could provide a great buffer should you find yourself financially strapped in the future. It's all about having an emergency fund to fall back on, and while you hopefully won't need to dip into it to cover your mortgage repayments, it's worth being prepared. Incidentally, you could even specifically build up a savings pot to reduce your mortgage's overall balance – see above – which means you could pay off a tidy sum when you come to remortgage.

What next?

Time to remortgage? Compare the options

Find the best savings accounts to build up your reserves

Check out 0% balance transfer cards

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.