Top tips for dealing with the Bank of England’s 0.25% base interest rate rise
As expected, the Bank of England has raised interest rates by 0.25 per cent to a total of 0.5 per cent – the first rise in 10 years.
According to a survey by Which.co.uk, just under half of mortgage holders – 42 per cent – have never experienced a rate rise and one in 20 variable rate mortgage holders will struggle to make ends meet.
The UK had seven years of a base interest rate of 0.5%, meaning lower mortgage repayments for many homeowners before the rate fell to a record low of 0.25% in 2016.
If you’ve bought your first home in this time you won’t have seen the years when the base rate was between four per cent and eight per cent, and even as high as 15 per cent. While it’s unlikely these levels will be seen again, the reality is that many homeowners will have to make their monthly budget stretch further.
So, can you afford an interest rate rise?
If you have a fixed term mortgage, it’s unlikely you’ll be affected until that period ends, but if you’re on a variable or tracker mortgage your payments will probably increase sooner.
A rise in interest rates could make paying back your mortgage more expensive if you are on a variable rate deal, or increase the cost of new fixed rate borrowing. On the other hand, you might see an increase on the return of your savings.
The impact any change in interest rates will have on you depends on:
– How much debt you have
– What type of debt you have
– How much in savings you have acquired
For example, if you have borrowed a lot on a mortgage, an interest rate rise could mean your monthly repayments become unaffordable and put you under increased financial pressure.
Working out what an increase will do to your repayments is the best first step and you should contact your mortgage provider if you have concerns over your repayments.
Remember, the Bank of England has raised the base rate, your current mortgage rate will be higher so add increases to that figure to work out what you will be paying.
Talk has been around interest rates finally settling at some point between three per cent to five per cent so work out what this would do to your repayments.
How much will my monthly payments increase?
Based on a 20 year mortgage on a standard, variable rate increasing by 0.25 per cent, from 3.74 per cent to 3.99 per cent, this is how the base rate increase will translate.
– Those with a £120,000 mortgage will pay an extra £15 per month or £180 per year
– Those with a £200,000 mortgage will pay an extra £27 more per month or £324 per year
– Those with a £250,000 mortgage will pay an extra £46 per month or £552 a year
Consider switching or fixing your mortgage
It’s possible to save hundreds – perhaps thousands – of pounds by shopping around, so it’s a good idea to review your mortgage at least once a year to check whether you should switch to a better deal. There has been a rise in low rate 10 year mortgages available, and our blog examines the pros and the cons.
Finding extra money to cover larger mortgage payments
Look at where you can cut back across your household spending. Reducing your outgoings as soon as you can means you can build up savings to help if you think you may struggle. Budget planning will give you a clear indication of where your money is going. It is important to stop creating any new debt and clear any existing debts you have as soon as possible.
If possible, start to overpay on your mortgage
Overpaying your mortgage can reduce the term of your mortgage and/or the size of your mortgage repayments. Make sure you find out what penalties and fees may apply and if they cut into any savings, which result from overpaying your mortgage. Many lenders will let you overpay at least 10% a year without penalties.
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