There is no denying that the rising interest rates are something that is, in one way or another, praying on the minds of most of us. The news is full of a lot of mixed messages about all kinds of financial issues from inflation to house prices crashing, but what does it all mean in simple, buzzword free, practical terms? In this, the first of two articles, we will be looking at the interest rate rises and break down what they are and could mean for you, as well as offering a little general advice.
What is it all about?
I am going to try to cut through all the confusing ‘financial speak’ with this article and get right to the practicalities. That means we will be talking in a very general way so, as we always remind you in these articles, you need to ensure you are taking the right advice for your personal needs. Call us and we can go into details, but for now, this article is really an overview.
So, let’s start with a little bit of context. The mortgage rate you are paying is affected by several things. Some of these are commercial, such as when the lenders are competing with each other and you get some great deal deals, some are set at a higher governmental level. The biggest factor at the moment is inflation. While the rate of inflation doesn’t necessarily affect the amount you pay for your mortgage too much (although it does have an effect) when inflation is rising it can have an impact because of how the Bank of England (BoE) reacts. One way to control rising inflation is to raise the interest base rate. As that rate rises, the mortgage rate rises. At the moment this what is driving the rise in the cost of a mortgage. So, to summarise, as inflations rises, the BoE raises interest rates to control it and that raises your monthly mortgage payments.
Again, all the above is a very broad generalisation of course and, depending on what sort of mortgage you currently have you may see an instant rise, or it may be delayed.
How much your monthly mortgage will go up will of course be dependant on how much you borrowed and what sort of deal you are on. If you are on a fixed rate with some time left to run on the deal, then you may be months away from feeling the effects. On the other hand, for other mortgages, you may see an immediate rise. How much that rise will be is occasionally surprising. A small change in the base rate of just 0.5% can result in 100s of pounds extra a year.
So, what can you do about it?
Well, that depends on where you are with your current mortgage as well as what your circumstances are. There are a few practical steps you can take though that will help you decide the best course of action.
1. If you are on a fixed rate and it is much lower than the current rates, make sure you know exactly when it will end and start shopping around in plenty of time before it changes.
2. Check what it will mean to you if there is another rise or a fall, so you are prepared financially for whatever happens.
3. Under no circumstances let your old mortgage deal run out and just accept whatever is offered. Maybe your current provider is offering the best option but the only way to find that out is to shop around and see what is available. We are happy to look at this for you.
4. Prepare for a new deal by improving your credit rating. BoE rates are not the only factor, and you will usually get a better deal the more creditworthy you are.
5. If you are considering moving, look at as many options as possible for the property as well as the mortgage. Could you downsize or move to a different area to decrease the cost of your mortgage perhaps? The amount of deposit you provide will naturally affect how much you need to pay off as well.
These are just a few thoughts on dealing with the increase in mortgage rates. There are other options and we are here to help you make the right choice.
So, what about the future?
Whether interest rates will continue rise or start to fall is a something that we would all love to be able to predict. Inflation is, as we mentioned earlier, the biggest cause of the current increase and that seems to be gradually coming back under control. That said, it isn’t the only cause so although it bodes well, it would be wrong to get too confident just yet. One small point that is worth remembering is that although the current rates are high compared to recent years, they are not unusually high in the longer view. We do need to be a little careful of expecting things to go back to where they were because there is no guarantee that it will happen in the short term. It may be that we will see a new normal.
As always, taking expert advice, seeing what your options are, and then making an informed decision, is the best course of action. Call us, let’s talk about your circumstances, and we will see how we can help.
In the next article we will be looking at if you should be considering a mortgage at the moment, what you should think about if you are, and also some of the things that you can do to help you get the best deals.