Prepare your finances to cope with the expected mortgage interest rate rise
With the Bank of England base rate at 5.25% and future interest rates rise expected before the end of this year. Households with mortgages can expect to pay much more for their mortgage repayments by the end of this year than at the start of the year. So, how or where can you save money in the hope that your finances would be in a sound state so that you can cope with the expected rate rise.
With over 1.6 million UK homeowners with a fixed rate expected to start looking for mortgages around December 2024. The current mortgage rates landscape brought about by the rate increase will see them facing a significant rate increase when shopping for remortgage. There are also more than 1.4 million people on tracker and variable rate deals who are likely to see an immediate increase in their monthly payments from another interest rate rise.
The 1.6 million whose fixed rate mortgages are expected to expire in December 2023, will have the added change of coping with the cost of Christmas. Here are some tips to help you navigate this if you are one of the affected people.
1. Stay ahead of the repayment curve by overpaying
Most mortgage lenders allow you to over pay by up to 10%. Why not use that allowance now by overpaying your mortgage by 10%. If you can afford to set even more money aside after paying the 10%, why not depositi it in a savings account and keep that savings account for a rainy day.
2. Switch your mortgage from repayment to interest only
If you can’t afford to make your regular loan repayments, you may want to consider switching to an interest-only payment plan. With this option, you would only need to pay back the interest portion of the loan and not the principal sum you borrowed. It could help free up some cash for other necessities and allow you to remain in control of your finances. You can always switch back to a repayment mortgage when your financial situation improves.
3. Consider downsizing or moving to a cheaper area
For those with older mortgages, when the children have left home, downsizing could result in a smaller mortgage – and possibly even paying it off completely. Another option is to move from the area you live at the moment to a cheaper area. Moving from say Gloucestershire to South Wales for example could help your finances so much that you may not even have a mortgage any more.
4. Extend your mortgage term
Most mortgages have a term of 25 years. There are now mortgages that allow you to repay over 30 or more years. Consider switching to a mortgage like that. This will solve your immediate repayment challenges on your original 25 year mortgage.
5. Generate additional income with your property
If you have a space room, you can consider letting out your spare room via short term letting platforms or renting it out on a long term basis. You are allowed to generate an income of up to £7,500 per year from your main home tax free.
Here are the mortgages affected by interest rate rises from day one
Tracker mortgages are linked to an external interest rate, such as the Bank of England’s base rate, which can change. If you’re on a tracker mortgage, you will already have seen an increase to your monthly payments due to recent base rate rises.
Variable rate mortgages can rise at any time, as the interest rate is typically set by your lender and isn’t directly linked to an external rate. If you’re on a variable rate mortgage, it’s likely that your monthly payments have already been affected.
Fixed rate mortgages won’t immediately be affected by the recent rate increases. However, if you’re close to reaching the end of your deal, or want to re-mortgage, then the rise in interest rates is likely to affect you.
Final words on preparing for mortgage interest rate rise
Saving money in preparation for a mortgage interest rate rise doesn’t have to be an intimidating task. Through careful budgeting, making smart investments, and setting specific financial goals, you can save enough money to cover the cost of higher payments when the time comes. Additionally, taking advantage of low-interest rates while they are still available is another great way to prepare for future mortgage payments. By following these tips and being mindful of your finances along the way, you can ensure that you’re ready when the time comes for a potential rise in interest rates.
You can find more information and help at the Financial Conduct Authority website.