With many experts predicting an interest rate rise in early to mid-2016 there has been increased focus on consumers currently on a variable rate mortgage and the potential cost implications they face.
The last time there was an increase in base rate was back in July 2007 so there are thousands of borrowers out there who have yet to experience the consequences of a mortgage market where rates start to climb.
A report from Equifax this week revealed that 78 per cent of homeowners on a variable rate home loan aren’t budgeting for the possibility of higher repayments despite eight out of ten of those affected believing there will be an interest rate rise within the coming 12 months.
In isolation this statistic may not be as scary as it first seems as factors such as the size of mortgage balance and whether the household budget has sufficient slack to absorb increased monthly mortgage repayments need to be taken into account.
What is more worrying is that the same survey highlighted that almost three in ten at risk of a rate rise weren’t aware how much extra they would have to find each month if their home loan rate increased by 0.50%.
As with most personal financial products half the battle is appreciating the ‘what if’ scenarios and for mortgage borrowers knowing what a rate rise will cost them is one of the most important.
If you know what the financial impact is likely to be, you will be in a better position to deal with it. For example you may not be overly worried as you have a healthy surplus in your household finances, but if things are already quite tight and there’s little spare cash left at the end of the month then it may be worth considering switching to a fixed rate mortgage to protect yourself from higher monthly costs.
If you decide to opt for a new fixed rate mortgage you’ll find there is a mind boggling array of products to choose from. Some offer low rates but with high product fees whereas others advertise higher rates with no fees. It’s worthwhile getting an independent mortgage broker to crunch the numbers to see which works out cheapest in your situation.
To put the potential increases into perspective, a borrower with a £130,000 mortgage balance with a 20 year term at a rate of 3 per cent would see their repayments increase by £33 per month if their mortgage rate went up by 0.50%. Similarly a borrower with £250,000 owing over 20 years at the same interest rate would see monthly payments increase from £1386 to £1450 per month, an extra £64 per month to find.
When those questioned by Experian were asked what action they would take to ensure the mortgage standing order was paid each month, 27% said they would cut back on food shopping whilst four in ten said they would cut back on going out and a third would reduce their spend on holidays.
The good thing is that the first rate rise is still potentially six to nine months away so there’s time to prepare.
So if you’re one of those many mortgage customers currently on a variable rate deal, have a quick word with your lender to check what the impact of a rate rise will mean for your circumstances – at least you’ll know what to expect and can plan accordingly.