Interest rates are likely to rise in 2015. The base rate has been at 0.5% for more than five years now, but as the economy improves we could see a gradual move towards what Bank of England governor Mark Carney calls a “new normal” of around 2.5 to 3%.
It’s impossible to know exactly when this will happen and predictions change from one month to the next. Any rise could be as gradual and as little as a quarter or half percent each time, or there could be larger full percentage point increases. Either way, the changes will affect anyone with a mortgage.
But there are ways to get ready.
1. Find out how much an interest rate rise will cost you
It’s worth looking at what the changes would mean to your mortgage rate and monthly payment.
Check with your lender if you’re unsure. You can also use ourMortgage calculator to work these figures out. In ‘price of property’ enter how much you have left to pay on your mortgage, and put zero in the deposit box. Then use the sliders to decrease the term to the number of years you have left to pay, and increase the interest rate. You’ll see the amount you’d pay each month change up on the top left hand side.
2. See how much you can afford
A budget will show what money you have coming in, what money is going out, and most importantly, how much you have left at the end. Our Budget planner tool will help you do all of this.
If increased mortgage payments mean you go from managing ok to struggling to get by, use the budget to look for areas you can cut back. Are you spending a big amount each month on travel? Do you think you can spend less when out shopping?
Our Cut back calculator will help you find areas where you can save.
3. Think about overpaying
If you have some spare savings, it’s worth seeing if you can make any overpayments to your mortgage, so check with your lender. You can do this in a lump sum, or just by increasing the monthly payments.
Overpaying £100 a month on a £120,000, 25-year mortgage charging 4% will save you £15,000 in interest payments. It will also shave five years off your mortgage, clearing it in just 20 years. Doing this before rates rise means you have a smaller mortgage to be charged interest on, so you’ll repay less overall.
However, there are reasons why it’s not always the best option, which you can read about in our Should you pay off your mortgage early article.
4. Explore a new mortgage deal
It’s worth looking into a new mortgage deal to see if you can take advantage of current rates. For certainty you could lock into a rate with a fix. Or you could stick with a variable if that works out more cost effective.
If your deal is coming to an end, the earlier you prepare the better. Speak to your lender as a starting point. You may need to move lenders to get the best deal, which mean you might need to have an affordability assessment.
If your home value has increased, it may mean your loan-to-value (LTV) ratio has also increased. This could mean you can choose from more lenders and lower rates. LTV and more remortgaging tips are explained in our remortgaging to cut costs guide.
SOUCE: blog.moneyadviceservice.org.uk