Can you afford to pay an extra £950 each year to your mortgage provider?
Last year, the Bank of England (BoE) raised the base interest rate for the first time in 10 years.
While this initial rise only saw the base rate increase from 0.25% to 0.5%, it should be considered a sign of things to come.
With experts predicting two further rate rises during 2018 and a year-end base rate of 1%, the time has come to analyse your finances and make sure that you can withstand an increase.
At the same time, it is worth understanding whether your finances can withstand any type of income shock.
How could further rate rises affect you?
According to a report from Savills, a rate rise of just 1% would add approximately £950 per year to each household’s mortgage payments. Costing the nation more than £10 billion in total.
The first to be affected will be those with variable rate mortgages, who account for 40% of British mortgage holders. Overnight, the annual amount paid by this group would increase by £4.3 billion.
59% of mortgage holders are enjoying the benefits of fixed-rate mortgages, which will not be immediately affected by any interest rate increases. However, once the initial term ends and their mortgage is transferred to a variable rate account, the impact of a sudden increase in monthly payments could be a cause for concern.
Whilst these figures are based on interest rates rising suddenly by 1%, experts are currently only anticipating two 0.25% rises in the next 12 months, making it unlikely that you will suddenly be faced with such high increases. However, that doesn’t mean it’s time to relax, if the rate of inflation rises suddenly, or the economy starts performing better than expected, we could see interest rates rise more quickly. Therefore, now is the time to take steps to secure your finances.
Is it time to fix your interest rate?
Guaranteeing that your interest rate will not be affected for a few years is one way to avoid being hit by sudden increases in mortgage repayments, but is it right for you?
The answer depends on a number of factors:
The mortgage rate you switch to: Switching your mortgage is only beneficial, if you are certain that you will be getting a better rate on the new plan.
Redemption Penalties: Will you have to pay a fee to repay your debt early and switch to a new provider?
Your circumstances: If you are not in a position to make big financial changes, i.e. your credit score has taken a hit, you may wish to wait until things are more likely to work in your favour.
The only definitive way to know if a new deal will be better for you than your existing mortgage is to take mortgage advice.
How can you protect your finances?
Ideally, you should be in a financial position which allows you to survive unexpected financial shocks. Whether they come in the form of interest rate rises, or a loss of income due to illness or injury, it is vital that you have a back-up plan in place to keep you afloat, should the worst happen.
Building and maintaining a financial buffer should be a priority. There are two main ways to do this:
1. Build up savings
Most experts recommend that you build a buffer which is equal to three-to-six months living costs. However, it is wise to top this buffer up occasionally and have a little extra available, just in case.
If you are finding it hard to contribute to your savings due to an already-stretched budget, consider:
- Economising on luxuries, such as takeaways and pre-packaged lunches
- Shopping around for better rates on your utilities
- Asking loved ones for help
- Seeing if you can get a better rate on a mortgage; by paying less each month, you will have more money to save toward retirement
2. Take out insurance
There is a range of cover available to protect your family against the financial difficulties that can come with a loss of income due to death, illness or injury, including:
Life Insurance: This pays out a lump sum or income to your beneficiaries if you die within the terms of the cover. You can read more about the importance of Life Insurance in this post from last year.
Critical Illness Cover: Pays out a lump sum or income to you if you are diagnosed with a serious or life-threatening illness, which is covered by the policy.
Income protection: replaces a portion of your usual income if you are unable to work due to illness or injury.
The importance of advice
The key to protecting your finances and deciding whether it is the right time to fix your mortgage rate, is to talk to a professional.
With both mortgage advisers and financial advisers available, we use our combined knowledge of the markets to create a strategy which will help you to reinforce your financial security and maintain confidence in your financial position.
To get started, give us a call on 02380 633377 or request a call back.