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Spend & Save

Simon Read: The Bank of England has given us a useful warning

Mark Carney, the Governor of the Bank of England, has done us all a big favour by revealing that interest rates are likely to rise sooner than expected. He said on Thursday that there is a strong possibility we will see the first rate rise before Christmas. That gives us notice to prepare now.

The advance warning is most helpful to mortgage borrowers. Why? Because it gives us a chance to get ready for the inevitable moment when our monthly repayments start to rise.

Mr Carney has indicated that rates won't rise quickly, but last month the Deputy Governor of the Bank suggested that the Base Rate could rise to as much as 3.5 per cent by 2017.

Given that it now stands at 0.5 per cent, that level of increase will have a marked effect on how much borrowers need to set aside to meet monthly mortgage payments. As long as rates rise slowly, there shouldn't be a devastating rate shock, such as repayments doubling overnight, for instance. But all borrowers will eventually face higher monthly charges.

But doing something now ahead of that eventuality it a sensible financial move. For starters it may encourage you to sort out a fixed rate deal as soon as you can.

If you have a bit of equity in your property– say 20 per cent – you can still get five year deals at around 4 per cent. If you have only 10 per cent equity you'll have to pay around 5 per cent.

The advantage of fixed rate deals is the certainty of payment, which helps your budgeting. If you know how much repayments are going to be for the next 60 months, for instance, you can plan the rest of your finances better.

But if you don't fancy the idea of a fixed rate at the moment, or have a lower variable rate that's worth sticking with, I reckon you should still act before rates start going up.

My advice is to overpay your mortgage now, if you can afford to. Calculate what your repayments would be if mortgage rates rose by 1 per cent and pay that now, if your lender lets you. There will be two benefits: you won't face a rate shock, and you'll have paid more of your mortgage off, saving interest charges.


Twitter: @simonnread