Rising interest rates: your future mortgage and affordability
It’s a tough time to find anything positive in the world of personal finance right now.
The focus for many of us is just getting by as best we can. But we also need to, at the very least, be aware of the future impact of rising interest rates on our money.
And if you have a mortgage, this is where planning ahead is going to be really important.
Firstly, something positive. If you’re on a fixed rate mortgage, you’ve been protected from rising interest rates. As somebody currently on a tracker mortgage, I’m quite envious!
Fixed rate mortgages provide peace of mind and the guarantee that your repayments will be the same for a set period of time.
Your step-by-step plan for future mortgage rates
Now for the negative…once your fixed rate deal comes to end, you’re 99% going to be bumped up to a higher rate, whatever the best ‘deal’ happens to be at the time. Predicting interest rates is not an exact science, but the data suggests we could be looking at interest rates of around 2.5% by 2023, staying that way for a few years.
1) Get a ballpark for future repayments on higher interest rates
We’ve all got used to very cheap interest rates on our mortgages. We’re now faced with the reality of higher borrowing costs which will eat into our finances.
Whether your current fixed rate ends in a year or 5 years, start thinking about how higher interest rates will affect your monthly disposable income in the future.
Your interest rate could be more than double what it is now. Pop your details into a mortgage repayment calculator and play about with interest rates. It can’t hurt to do a bit of research now to help plan ahead. It’s becoming more and more apparent that higher interest rates will be around for the next few years.
Mortgage lenders call this stress testing. They do this in the background when assessing an application for a mortgage and what could happen if interest rates go up. But for you and I, we’ve never really had to think about it as interest rates have been so low.
2) DON’T assume a new mortgage lender will accept you on the same terms as before
The increase in the cost of living means mortgage lenders are being stricter when assessing if you can afford a mortgage in the first place.
When your current fixed rate ends, you will automatically switch to your lenders Standard Variable Rate, which is typically the most expensive type of mortgage rate. At this point your lender won’t reassess you.
Rate switch vs Remortgage
A rate switch is where you stay with your existing mortgage provider and switch to a new rate. Its not something many people consider but is a good first port of call as it saves a lot of admin. With a rate switch, as you’re an existing customer and assuming you’ve kept up with your repayments, its unlikely you’ll need to go through new affordability checks.
A remortgage is when you change your mortgage to a new provider. You’re effectively starting the process all over again. Which means brand new affordability checks and credit checks etc. Expect your finances to be forensically examined.
3) Spare cash now? Think about making extra repayments to reduce your mortgage balance
If, and that’s a big if, you’re in the fortunate position of having surplus income, you may want to consider making extra repayments sooner rather than later.
Spare cash is anything ON TOP OF your emergency fund. It’s unwise to use rainy day cash to pay off your mortgage.
Getting the best interest rates is based on your LTV (Loan To Value)…so the less you need to borrow vs the total value of your property, the better the interest rate. This is because the lender doesn’t have to take as much risk when giving you a mortgage.
Remember, the lower the LTV (it’s a % figure), the better the interest rate you can get.
So, if you’ve paid off more of your mortgage by the time your fixed rate ends, you effectively have more equity in your home and need to borrow less in the future. So your LTV goes down.
4) Get your spending dialled in within a few months of applying for a remortgage
There’s a golden rule when it comes to buying a home: Bricks first, babies second.
Why? Because the costs of raising a child can seriously impact the chances of you getting the best mortgage deals.
And the same is true when it comes to remortgaging.
Your income and spending will be scrutinised – so don’t go spending lavish amounts of money in the months before you’re going to apply for a new mortgage.
Even if you know that your spending within your means, a mortgage lender will stress test this with higher interest rates. If lenders think your spending is inconsistent or too high, they may consider you too risky to lend to.
Your mortgage application is like a CV. You want to make the best impression.
5) Struggling to keep up with payments? Talk to your mortgage lender
If you find yourself struggling to keep up with higher mortgage repayments, don’t try and deal with it by yourself.
The first thing you should do is phone your mortgage lender and explain your circumstances.
Don’t look into credit cards or other loans to try and keep you going.
We have this fear that as soon as we tell a lender we are struggling, we might get our homes repossessed or the bailiffs might come knocking. That’s not true.
A mortgage lender has a duty of care towards their customers. Explaining your situation will mean that they can offer support wherever they can. They will not judge you.