Interest Rates And the Impact On Your Mortgage
Interest rates may not enter your thoughts on a daily basis, but they have the potential to impact your life in a huge way. Depending on the type of mortgage you hold, a rise in interest rates may have more of an impact than on other people, but eventually, every mortgage holder will be impacted on by interest rates.
Figures provided by the Bank of England suggests that 57% of homeowners hold a fixed-rate mortgage while the remaining mortgage holders have a variable or tracker rate mortgage.
Fixed rate mortgage holders can relax for now
For now, fixed rate mortgage holders can relax and be confident that their monthly payments will not change. The consistency of payment is the most important aspect of the fixed rate mortgage and while variable rate mortgage holders will be scrutinising their budget to ensure they can afford a monthly increase, fixed rate mortgage holders have nothing to worry about. For now.
For as long as the fixed rate mortgage is in effect, the payments a mortgage holder makes each month remains constant. However, fixed rate mortgages come to an end and the mortgage holder must find a new agreement. If they are unable to sign up for a similar fixed-rate mortgage, they may find that their monthly payments rise and are at risk of rising further. In the short-term, fixed rate mortgage holders can relax but it is best to think about the long-term. It also isn’t nice to gloat about the situation facing some variable rate holders because you never know what is going to happen in the future.
Interest rate increases in 2017 impacted on many homeowners
The rise in interest rates near the end of 2017 was the first increase in interest rates for a decade. Given that the rise was minimal, in the words of Bank of England Governor Mark Carney, the change could have had a bigger and more negative impact on people, but it is important to be aware that people were affected.
Households who had a £200,000 mortgage found that the increase of 0.25% led to their monthly mortgage payments rising by £25.39 per month. If a household was already close to their limit each month, this increase may have been enough to cause them financial difficulties.
When examining interest rate increases and the impact on a mortgage, it is vital that people consider the personal impact. An increase of £25 per month may not be noticed by some people but for others, it could be life-changing. It is imperative that people look at changes from their own personal circumstances and then make decisions based on their findings.
Given that there are some market specialists predicting that there may be an increase of 0.5% on interest rates in the near-future, a household with a £200,000 mortgage would face an increase of £51.19 per month. This is a figure that would leave many people noticing a change and over the course of the year, the mortgage holder would pay an additional £612 per year in mortgage payments.
A household with a £150,000 mortgage would have found that a 0.25% in interest rates would have increased their monthly payments by £19.15 per month and with a 0.5% increase in interest rates, the increase in monthly payments amount to an additional £38.61 in mortgage payments each month. An increase of £38.61 per month would lead to an increase of more than £460 over the course of the year. Again, it is vital that people consider their own finances and budget constraints before deciding whether this is an increase that they can easily manage or whether it would place them under greater financial stress and pressure.
Create an action plan for dealing with interest rate increases
If you are looking to manage an interest rate rise on your mortgage, here are some tips to bear in mind:
- Make sure you know what mortgage you have and how this is likely to be affected
- Know what your budget is and what you can afford to pay each month
- Determine what impact an interest rate increase will have on you
- If you have concerns over mortgage payments or your budget, speak to professionals and seek help as soon as you can
- Improve your credit score as best as you can
- Review if there are other mortgages which may be more suitable for you
- When you can, overpay your mortgage
Following these seven steps will help you to evaluate the situation and make an informed decision about what to do next. No matter what impact you think market changes will have on you, it is essential that you don’t panic nor, should you make a rash decision.
It is important to seek help if you have concerns about meeting payments, but you shouldn’t rush into major decisions when it comes to finances or paying your mortgage. You will also likely find that many people are in a similar position to you, so you are far from being alone if you have concerns about meeting mortgage payments or what impact further interest rate increases will have on you.
With further interest rate increases likely, now is the ideal time to act with respect to your budget and finances. No one likes paying more money but by reviewing your mortgage, knowing your options and planning sensibly, you should find that you can manage interest rate increases in your stride.