Will you be able to afford your mortgage if interest rates rise?
Published 26 July 2015 by Emily Bancroft
Paying off a mortgage? Will you be able to cope if your monthly payments rise?
Predicting what’s going to happen in the future when it comes to your finances may seem impossible but we’ve just had a big clue from the Bank of England. The Governor Mark Carney has said that the Bank of England’s base interest rate is likely to rise around the end of the year and if you’ve got a mortgage, this could affect how much you’ve got to pay every month.
When your original mortgage deal runs out, you’ll be put on your lender’s Standard Variable Rate, and this is usually linked, either explicitly or loosely, to the Bank of England’s base rate. Let’s take a look at how much your payments could go up by and what you could do about this.
According to Mark Carney, the Bank of England’s base interest rate is likely to increase from 0.5%, the historically low rate it’s been at for more than five years. It’s not likely to jump up two or three percent overnight, it’s expected to increase in stages – perhaps by 0.25% each time. Over the next few years, the base interest rate is rise slowly, peaking at around 2% or 2.5%.
This is by no means a guarantee though, as Mark Carney stressed that any proposed rises will depend on whether the economy continues to improve. If anything suggests that the economic state isn’t getting any better, then it’s likely that any interest rate rises will be held off until at least mid-2016. It’s important to keep an eye out for any updates, as it’s likely we’ll hear more about this over the coming months.
What effect it will have
If you’ve got a mortgage, any rise in the Bank of England’s base rate could affect what you have to pay every month. When you first took out your mortgage, you may have opted for a fixed rate, a discounted rate or a tracker mortgage. Usually these deals last a set period of time – typically two to five years. After this deal expired, you’ll probably have been moved onto your lender’s Standard Variable Rate. This is usually a few percentage points above the base rate so when interest rates go up, that will too.
You might not be sure what mortgage rate you’re on now – and if this is the case, you’re probably on the Standard Variable Rate. So how much would a 0.25% increase in interest rates affect what you’re paying?
Let’s say you’ve still got £50,000 left to pay off on your mortgage over the next ten years. According to the Council of Mortgage Lenders (CML), you’ll be paying an estimated £491 every month. The increase in interest rates means your new payment would be £497, an increase of £6. While this might not seem like much, the more you’ve still got to pay back, the bigger your increase would be. And if interest rates continue to creep up over the next couple of years, you might find that your finances become more stretched.
What you can do
Don’t worry – if you think you’re likely to be affected by a rise in interest rates, you don’t have to stay on the Standard Variable Rate. You can fix your mortgage rate for almost any length of time – two, five or even 10 years are the most common but other fixed rate deals may be available. That way, you’ll know how much you’ll have to pay every month for that period, and you’ll be able to budget for it without worrying that your payments could increase.
Speak to your lender if you’re thinking of fixing and see what deals they currently have on offer. However, you don’t have to be tied to them – you might be able to get a better offer with another lender or by going through a broker. Don’t feel rushed into anything, interest rates aren’t going anywhere yet, and it’s important that you make an informed decision about your mortgage based on all of the facts.