Interest rates are expected to rise again this month, which is set to be the eleventh consecutive increase in little more than a year. The hikes will be a further blow to mortgage customers, as base rate rises make borrowing more expensive.
Which? shares ways that customers can prepare for, and combat, mortgage rates going up.
1. Assess the impact on your finances
Customers on a tracker mortgage will see an immediate impact on their monthly repayments if there is an interest rate rise.
Those coming to the end of a fixed-term deal will likely be met with double or even triple their current costs when they come to remortgage, as rates will likely be higher than when they first took out a deal.
Think about how much you can afford to pay each month and whether there’s likely to be any change to your income in the short-term. If you’re struggling or think you’ll struggle to pay your mortgage, seek advice as soon as possible. Speak to your lender and tell them about your issues – there are support options out there.
2. Figure out what type of mortgage suits you
People who are due to remortgage, or are in the process of buying a property, will need to consider what type of mortgage is best to secure.
The majority of homeowners opt for fixed-term deals, as repayments won’t be impacted by interest rate hikes for the duration of the term. The most popular terms last for two, five and 10 years.
There is more risk with a tracker mortgage, as the base rate could potentially continue to rise significantly, but as and when the interest rate falls it could work out cheaper. However, tracker deals often come with a ‘collar’, which specifies the minimum rate you have to pay. Even if the base rate falls dramatically, you won’t pay less than the collar.
3. Hunt for a new deal before your mortgage expires
Be proactive in hunting for a new deal, particularly if you’re one of the 1.4 million homeowners whose fixed-term mortgage is coming to an end this year.
When a fixed-rate or tracker mortgage deal ends, you will usually be moved automatically onto your lender’s standard variable rate (SVR), where the interest rate will likely be higher. This rate can also be increased at any time, irrespective of what is happening with the base rate.
Before this happens, there is a window to lock in a new deal before your existing one ends. Depending on the lender, you can secure a new deal up to six months in advance. You could make savings on repayments by getting a new mortgage locked in before an interest rate hike – and avoiding an SVR.
If you sign up for a new deal a number of months in advance, be sure to check the provider’s terms. If you spot a better offer elsewhere before the new mortgage deal starts, some lenders allow you to switch to a cheaper offer right up until you officially remortgage, while others won’t allow you to budge.
4. Act quickly to get the best deals
Those in the process of buying a property – or with a mortgage that is up for renewal very soon – might not be able to wait if they are hoping to secure a competitive new mortgage deal.
The cheapest deals are currently below 4 per cent, but many aren’t staying on the market for long. Platform and the Co-operative Bank’s market-leading 3.75 per cent deals for 60 per cent loan-to-value (LTV) were recently withdrawn, while Nationwide also recently withdrew its sub 4 per cent offers. This may be due to high demand, or lenders pricing in the likely forthcoming base rate rise early.
If you find a competitive deal you’re happy with and know you can comfortably afford, it is worth acting quickly before it disappears.
5. Consider overpaying your mortgage
While it isn’t an option for everyone, customers with a repayment mortgage (as opposed to an interest-only deal), can combat the impact of an interest rate hike by overpaying their mortgage which will drive down the cost of the loan – potentially saving thousands in the long run.
Overpaying increases your equity in the property – that is, the proportion of your home that belongs to you. The bigger your equity the lower your loan-to-value when it comes to remortgaging, which can give you access to more competitive rates. For example, rates tend to be cheaper at 85% LTV compared to 90% LTV.
Many lenders allow overpayments of up to 10 per cent per year, but larger overpayments may incur a penalty. However, NatWest has recently doubled its annual overpayment allowance to 20 per cent.
6. Improve your credit score
The mortgage you can get can also be influenced by your credit rating. Those with poor credit scores who are due to apply for a mortgage might not be successful with some lenders, especially those offering the best rates.
To address this now, you can improve your credit rating by taking a number of steps – including updating your address, correcting any mistakes on your credit report and getting on the electoral roll.
Reena Sewraz, Which? Money Expert, said:
“Millions of mortgage borrowers will be worried about the upcoming interest rate decision and the impact this will have on their finances, particularly as many are already feeling the pinch of higher prices on food and energy.
“There are steps you can take to protect yourself from rising rates. Well before your mortgage deal expires, hunt for a new rate, as most lenders will let you secure it for up to six months in advance. If you can, overpay your mortgage to build up your equity to unlock cheaper deals when you come to remortgage, and make sure your credit report is in good shape to secure the best deals on the market.”
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