Back in November 2017, homeowners were hit with the first rise in the Base rate for a decade. While rates have stayed stable at 0.5% since then, many commentators think it’s only a matter of time before mortgage rates rise again.
The governor of the Bank of England told the BBC in April that an interest rate rise is "likely" this year, but that any increases will be gradual.
According to the Bank of England, 43% of homeowners are on variable or tracker rates. That means nearly half of all mortgage holders will face increased repayments if the Base rate were to rise. So, how can you prepare for a rise in your mortgage rate? Keep reading for the best tips.
Work out how much your repayments will rise by
If you’re concerned about the prospect of rising mortgage repayments, it can pay to establish just how much more you would pay if rates were to increase.
Most experts expect the Base rate to creep up slowly, and it’s unlikely that the rate will rise by more than 0.25% at a time. So, based on your outstanding mortgage and term, use an online mortgage calculator to work out how much more you will pay. Alternatively, get in touch with your lender and ask them to work it out for you.
Of course, if you’re already on a fixed-rate deal then your mortgage repayments won’t change. However, if you’re on a variable or tracker rate, you can expect your payment to go up.
The Financial Services Compensation Service (FSCS) say that the repayments on a variable rate mortgage on typical borrowings of £121,678, with an interest rate increasing from 2 to 2.25 per cent, would rise by £15 a month, from £516 to £531.
Create a budget
If you’re on a tracker or variable rate and you expect your mortgage repayments to rise, you should work out if you can afford the increase.
Once you have established how much your mortgage will cost after a rate rise, create a budget planner to check you can deal with the increase. If you complete a planner to work out your income and expenditure you will be able to establish whether you can afford the rise. If not, you can take steps to cut your costs now, so you can afford your increased repayments when they hit.
Review your existing expenditure
As part of creating a budget, you should look closely at your existing expenditure to see if there are any savings to be made.
Firstly, check what mortgage deal you are on and whether there are cheaper options available (see below).
You can then review your other regular payments to see if there are savings that you could make. You could save money by taking a better deal or switching provider for your:
- Gas and electricity
- Home, car or pet insurance
- Broadband
- Mobile or landline phone.
In addition, are there any direct debits that you are paying that you could cancel? Do you need a gym membership? Are there magazines you subscribe to and never read? Or are you paying for a TV service that you don’t watch?
Start putting money aside now
If you do have room in your budget now, you can start:
- Making overpayments to your mortgage. Check that your lender will allow you to overpay and that any extra payments that you make come straight off your mortgage balance. If you can pay off some of your mortgage, then you may find your repayments don’t rise as much when interest rates increase.
- Putting money aside. Consider saving a little extra every month in order to build up an ‘emergency fund’ that you can dip in to if you need to when interest rates increase.
Shop around for a fixed-rate deal
If you’re currently on your lender’s Standard Variable Rate (SVR), or your existing mortgage deal is coming to an end, then you could consider switching onto a fixed-rate product.
Mortgage expert David Hollingworth told the Herald Scotland: “The clear message to borrowers who are nervous about the impact of another rate rise is to take action now. It’s not too late to get hold of a great rate, but those who put off the decision are likely to kick themselves.”
Fixed-rate mortgages guarantee your repayments at a certain level for a specified period of time; typically, two, three or five years. If you take a fixed rate, then you won’t pay any more for your mortgage irrespective of how much the Base rate rises by during your fixed period.
Bear in mind that there may be costs to remortgage onto a fixed rate, and that you can face significant early repayment charges if you want to pay off your mortgage within the fixed period.
An independent mortgage broker will be able to help you find the best deal for you.
Mr Hollingworth adds: “Locking into a fixed rate should still offer good savings over a standard variable rate and also protect against any future rate rises.”
Improve your credit score
It sounds like an unlikely thing to do in advance of an interest rate rise but improving your credit score could help you enormously. If you can increase your credit score, then it will make it more likely that you can remortgage onto a great deal in the future when rates rise.
Get a copy of your credit report from one of the leading credit reference agencies such as Equifax or Experian. Check that you are on the electoral register and that all the information in your report is correct and up to date. If there are any errors, correct them now.