17 October 2014
Safeguard against impending interest rate rises
With a rise in the Bank of England interest rate on the horizon, many homeowners in Wales are readying themselves for an unwelcomed increase in their monthly mortgage repayments. Here, Julie-Ann Haines explores the important questions that mortgage holders should be asking to safeguard themselves against rate rises.
Interest rates play an important part in the financial lives of anyone that has a savings account, a mortgage, or both. Whether it’s the amount earned on a savings balance or the size of a monthly mortgage repayment, interest rates can impact considerably on our household budgets.
Of course, fluctuations in interest rates invariably either favour the saver or the borrower, but never both at the same time.
A high interest rate environment is good news for savers as savings accounts will generally reward savings balances with higher interest payments. A low interest rate environment, on the other hand, favours the borrower as historically low interest rates have made it cheaper to borrow money.
The record low interest rates of recent years have been good news for homeowners as mortgages have been inexpensive compared to those on offer during the 1980s and 1990s. But the tide is turning and experts predict that interest rates will soon start to rise - and when they do, it is likely that so too will the rates of many of our mortgages.
But what can mortgage holders do to protect themselves from rising interest rates?
The first question for anyone with a mortgage to consider is whether they’re currently on the most suitable mortgage for their financial circumstances.
The key to safeguarding yourself from the impacts of an interest rate rise is to dust off your mortgage documents and familiarise yourself with the conditions of your loan. Check your interest rate, the term of your mortgage, the amount of your monthly repayment and look to see if there’s any penalty for redemption or overpayment.
The likelihood is that anyone who’s had their mortgage for a few years will have experienced a change in their personal financial circumstances, whether that is a change in job, family circumstances or home improvements, the mortgage which was right a few years ago may no longer be best suited to your current needs. Arming yourself with the key facts of your mortgage and evaluating your monthly household budget will make you better placed to assess the suitability of your existing mortgage, and will help you compare your mortgage against others on the market.
So what if your financial investigations suggest that maybe you have a mortgage that isn’t quite meeting your needs?
Knowing when to change your mortgage is an important skill for any homeowner and a discussion with a mortgage advisor can help give you the confidence to know when the time is right to do so. While a mortgage is invariably a long-term loan, switching mortgages is common place and employed by savvy homeowners across the country to help improve their financial circumstances.
The mortgage market is awash with a wide range of products designed to cater for the varied needs of UK homeowners. The reality is that it’s important to act the moment you realise your current mortgage isn’t quite meeting your needs.
When changing mortgages, one of the first decisions to be made is whether a fixed or a variable rate product is the one for you.
With a fixed rate mortgage, the interest rate charged on the loan is fixed for a pre-agreed period of time. This fixed rate gives customers peace of mind in knowing their mortgage repayments will stay the same irrespective of any fluctuation around the Bank of England official Bank Rate. Variable products are less rigid and the interest rates charged on these loans, although often cheaper at the outset, fluctuate in accordance with the Bank Rate, and the standard variable rate of the lender.
With interest rate rises on the horizon, many of those homeowners with variable rate mortgages will likely experience a rise in their interest rate. So, while there’s no right or wrong decision, homeowners are increasingly turning to fixed rate products to protect themselves from the impact of rising rates on their monthly outgoings.
For those that are satisfied they are on the right product, another commonly asked question is whether there’s any value in overpaying on a mortgage? In reality, most homeowners already commit a hefty portion of their monthly income to their mortgage but for anyone with money left over at the end of a month, overpaying on a mortgage is a really effective way of shortening the term of the loan. If you are financially secure and able to pay more off your mortgage now it can help to lower your payments when an interest rate rise does come into effect.
If you are fortunate enough to have additional income that can be committed to your mortgage repayments on an ongoing basis, you should consider reducing the overall term of a mortgage, this will save homeowners considerable amounts of interest over the term of a mortgage.
Responsible mortgage management is about asking all these important questions, considering your options and not being afraid to move your mortgage if the evidence suggests there could be a more suitable deal elsewhere. Remember, a mortgage is a long term loan so even a small saving every month can add up to a significant sum over the duration of your mortgage to help you own your perfect home.