How Will Rising Interests Rates Effect Your Mortgage
If the Bank of England interest rates rise so will your mortgage rates. If these rates increase too much it could have a damaging effect on being able to repay your mortgage.
Since the financial crisis in 2008 banks have been strict on who they lend to. They have to make sure you can make repayments should the interest rate rise. This is where affordability criteria comes in. The bank will look at your finances and establish how much income you have left over have paying all your bills. Banks will have different criteria but usually you need a high % of expendable income in order to secure a mortgage.
If you already have a mortgage then its worth asking your self, if interest rates where to rise could you afford to make your repayments. If the answer is no then you should look at your life style spending and try to plan in the event rates do rise.
Mortgage Interest Rates
Interest on mortgage is calculated as an APR which means the interest you have to pay is calculated per year, not per month. The longer the full debt remains unpaid the more interest is added. This is called compound interest.
To explain this we can use an example. If you had a 5% interest mortgage over 25 years which cost £400,000 the total debt you had to repay would not be £420,000 (£20,000 in interest). Because the interest is compounded, interested in added on top of interest and repeats. You would actually pay back £701,000 where £301,000 of that is interest if you where to repay the minimum amount.
This is why you should try to reduce the amount of interest as soon as possible by overpaying.
The interest rate of your mortgage determines how much you have to pay each month. The interest rate can change based on a number of variables so you might end up paying more or less per month depending on how this rate changes.
You can decrease the amount you pay in interest by overpaying on your mortgage. For example if your monthly payment is £750 and you decided to pay £1200 per month this will decrease the amount you have to pay in interest and reduce the overall time it takes to completely pay off the debt.
How Mortgage Rates Are Effected
The interest rate you get with your mortgage can be effected by 3 things. The Bank of England, The market and lender deals.
Each lender will have a base rate that is typically set by the bank of England. If you have a discounted interest rate then the base rate is what you will pay once your deal ends.
For example if you have a 2.2% interest rate fixed for 2 years and the base rate for your lender is 3.4% then after 2 years your interest rate will rise to 0 3.4% and also your monthly repayment.
Bank of England Base Rate
The biggest risk to interest rate is the Bank of England. If they decide to put interest rates up then this can have a significant effect on how much you pay each month. If rates rise too much then you may struggle to pay back your mortgage and your home might be repossessed.
Let say you have a £200,000 mortgage 1.8% fixed for 2 years which means you are paying back £828.37 each month. Once you deals ends your base rate goes to 3.1% which means you will pay back £958.86 if the bank of England increases the interest rate to 4.2% you would be paying back £1,077.88 which is an extra £249.51 per month you will need to find.
Its always a good idea to monitor what the Bank of England is doing so you can plan ahead.
If You Struggle To Make Repayments
If you are unable to make regular repayments then you should speak to your lender about the steps to take in order to keep paying.
Sometimes lenders will increase the term of your mortgage to reduce your monthly payment or they will setup a payment plan to repay missed payments.
If you have suddenly lost your job or have become ill and out of work then you should check your mortgage protection insurance. You should be able to claim some of your mortgage repayments until your issues are resolved.
What a lot of people do is remortgage. This can often give you a better deal and lower monthly repayments but they may be some fee’s.