Mortgage blog: Two steps to help you detonate your ‘mortgage timebomb’
Recent comments from outgoing Bank of England governor Mervyn King may have sent shivers down the spines of millions of mortgage borrowers. Borrowers in their 30s and 40s are facing a ‘mortgage timebomb' according to Mr King who told MPs that households which are heavily in debt could struggle with increased mortgage repayments and other loans if interest rates rise.
With interest rates having been at their record low since March 2009, many people have become comfortable with the level of their mortgage payment. However, as The Independent reports, this low-rate environment "may not have prepared them for the prospect of rising rates when mortgage demands could be so much higher."
So, should you be panicking about your mortgage? An industry commentator doesn't believe you should, and recommends two easy steps you can take now to avoid a future ‘timebomb'.
"If you have any spare money each month, paying an additional amount to your mortgage is an easy way to avoid problems further down the line," says Keith Osborne, editor of WhatHouse.co.uk. "Reducing the amount that you owe will have the effect of leaving you with a smaller mortgage when rates finally begin to rise. And, because you owe less, any increase in your repayments is likely to be more manageable."
Most mortgage lenders will allow you to repay a certain amount each year without incurring a penalty - even if you are on a fixed- or tracker-rate deal. You could also consider a flexible or ‘offset' mortgage which allows you to overpay and redraw the money whenever you like.
Fix your mortgage rate
One way that you can protect yourself against future rate rises is by fixing your mortgage. There are lots of low cost fixed rate deals available at the moment - although you should take care about how long you fix for.
"Fixing for two years will give you the cheapest payments, although your rate is likely to expire just at the time when rates are beginning to rise," says. "Many people are choosing longer-term fixed rates as this gives you the security that your payments won't change for five years or more. Some lenders have even launched longer term deals such as Yorkshire Building Society's 10-year fixed rate. However, these deals often come with substantial early repayment charges. This means that if your circumstances change and you want to repay your mortgage early you could face a huge penalty."
Click here to find out more about how whathouse.co.uk can help you find the right mortgage.