Interest rate rise: Have you budgeted for the possibility of higher mortgage repayments?

There are thousands of borrowers out there who have yet to experience the consequences of a mortgage market where rates start to climb

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The Independent Online

With many experts predicting an interest rate rise in early to mid-2016 there has been increased focus on consumers on a variable-rate mortgage and the potential cost implications they face.

The last time there was an increase in the base rate was in July 2007, so there are thousands of borrowers out there who have yet to experience the consequences of a mortgage market where rates start to climb.

A report from Equifax this week revealed that 78 per cent of homeowners on variable-rate home loans have not budgeted for the possibility of higher repayments, despite eight out of 10 of those affected believing there will be an interest rate rise within 12 months.

In isolation, this statistic may not be as scary as it first seems, as factors such as the size of mortgage balance and whether the household budget has sufficient slack to absorb increased monthly mortgage repayments need to be taken into account.

What is more worrying is that the same survey highlighted that almost three in 10 at risk of a rate rise were not aware how much extra they would have to find each month if their home loan rate increased by 0.5 per cent.

 

As with most personal financial products, half the battle is appreciating the "what if?" scenarios, and for mortgage borrowers, knowing what a rate rise will cost is one of the most important. If you know what the financial impact is likely to be, you will be in a better position to deal with it. For example you may not be overly worried as you have a healthy surplus in your household finances, but if things are already quite tight and there's little spare cash left at the end of the month, then it may be worth considering switching to a fixed-rate mortgage to protect yourself from higher monthly costs.

If you decide to opt for a new fixed-rate mortgage you'll find there is a mind-boggling array of products to choose from. Some offer low rates but with high product fees, while others advertise higher rates but no fees. It's worthwhile getting an independent mortgage broker to crunch the numbers, to see which works out cheapest in your situation.

To put the potential increases into perspective, a borrower with a £130,000 mortgage balance with a 20-year term at a rate of 3 per cent would see their repayments increase by £33 a month if their mortgage rate went up by 0.5 per cent. Similarly a borrower with £250,000 owing over 20 years at the same interest rate would see monthly payments increase from £1,386 to £1,450, an extra £64 a month to find.

In today's post-mortgage market review (MMR) environment, where there is very detailed analysis of a mortgage applicant's income and expenditure, if there wasn't £30 to £64 of leeway in the family finances then the loan would probably not have been approved in the first place.

Those surveyed said they would cut back on holidays, going out and food shopping to meet repayments.

The plus point is that the first rate rise is still potentially six to nine months away so there's time to prepare.

So if you're one of those many mortgage customers on a variable rate deal, have a quick word with your lender to check what a rate rise will mean for you – at least you'll know what to expect and can plan accordingly.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk

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