After six years at an all-time low, the Governor of the Bank of England, Mark Carney, has suggested that interest rates could rise before the end of the year.
Over the past few years we’ve all grown used to low interest rates; mortgage holders have enjoyed them, whilst savers have had to endure considerable pain. So with an interest rate rise predicted what action should you take?
If you have a tracker rate mortgage
As the name suggests, the interest rate charged on a tracker mortgage is usually pegged to the Bank of England base rate.
Therefore when the Bank decide to increase rates by say 0.25%, the interest rate payable by people with a tracker mortgage will rise by the same amount.
Figures from the Council of Mortgage Lenders (CML) show that a 0.25% increase in interest rates would push payments up on a typical £100,000, arranged on a capital repayment basis with 10-years to go, by £13 per month. Whilst this would be manageable for most people, a mortgage of £200,000 would rise by £25 per month and payments for a £250,000 loan would increase by £31 per month.
It is also worth remembering that over the course of the coming months and years we are likely to see more than one rate rise, pushing up monthly repayments even further.
So what should borrowers with a tracker rate mortgage do?
We would suggest two things:
- Firstly, start to prepare for interest rate rises by comparing your spare monthly income to the possible increase in your mortgage payments. If necessary now is the time to start economising, to ensure that you can cope if we get multiple rate rises
- Secondly, look into the possibility of changing to a fixed rate mortgage and compare the monthly repayment this would give with what you might be paying if rates rise. Remember to factor in any costs of moving your mortgage and that in all likelihood any fixed rate will be higher than the interest rate you are currently paying; although the added security may make this worthwhile
If you have a variable rate mortgage
Whilst the interest rate payable on tracker mortgage changes automatically, those borrowers with a variable rate loan will need to wait for their lender to make the alteration.
There is the possibility that as many lenders didn’t pass on the full cut in interest rates when they were falling, they may not push them up in line with changes made by the Bank of England.
Of course this may not be the case and lenders may decide to immediately increase the interest rate they charge to you.
You therefore need to be cautious and we would therefore suggest you take the same action as if you had a tracker mortgage.
If you have a fixed rate mortgage
The good news, at least in the short term, is that any increase by the Bank of England won’t affect you.
However, you should carefully watch what happens to interest rates, especially fixed deals, as they could be significantly higher when you come to the end of your deal.
Therefore, despite the fact you are currently on a fixed rate, you should start to budget now, for higher payments in the future.
Most savers will greet the possibility of an interest rate rise with some skepticism. After all, savings rates have been low for so long many people will have given up hope of seeing a rate rise.
However, despite the “I’ll believe it when I see it” attitude savers would be forgiven for taking, there are still a number of things they should do to prepare themselves when the day finally arrives:
- Avoid long term fixed rate bonds which you cannot access before the end of the term; being tied in to an account, which becomes uncompetitive when interest rates rise, would be hugely frustrating
- Pay as much money as possible in to Cash ISAs to enable you to shelter as much interest from tax as possible
- Remember that from 1st January the maximum amount of compensation you can receive if your bank or building society goes bust will fall from £85,000 to £75,000
We’re here to help
Whether you are a saver or borrower, you need to take action now to prepare for a rise in interest rates.
If you are concerned about a potential rise in interest rates we are here to help you. Call Sarah or Bev on 0115 933 8433 or email email@example.com
Please note: You home maybe repossessed if you do not keep up repayment on our mortgage