Before getting a mortgage, you probably worked exactly how much you could afford to repay each month... but could you manage if interest rates rose?
With more new mortgage holders being asked by lenders to show how they would manage their repayments if interest rates went up 3%, now might be the time for current homeowners to ask themselves the same question.
Mark Carney, the Governor of the Bank of England, recently suggested that the base rate of interest – after being held at 0.5% since 2009 – could soon start to rise again*. He forecast that interest rates could have risen to 2.5% by 2017.
Mortgage rates can closely follow the base rate of interest, so if this rises it’s fair to say that rates for home loans will too. This could have consequences for anyone on a standard variable rate (SVR) mortgage (the lender’s own rate) or a tracker mortgage (which tracks the Bank of England’s base rate).
Unlike a fixed rate mortgage, where you pay the same sum every month for the length of your fixed term (say, two, three or five years), with a tracker or SVR mortgage your payments could alter each month as rates change. This is great news if rates fall, but may not be so good if they rise.
Could you pay 3% more?
A recent survey** conducted for us asked mortgage holders how they would cope if their repayments increased by 3% (assuming a 3% interest rate rise would potentially mean paying an additional £150 a month for every £100,000 borrowed). Worryingly, nearly half said they would either definitely struggle or potentially have difficulties keeping up with the increased repayments.
In terms of what they would do if they found themselves in that situation, nearly one in 10 homeowners said they would seek to immediately sell their property if their repayments increased by 3%. More than a third also admitted they might struggle and would look at ways to save money.
One way to do this was to work more hours, which one in 10 mortgage holders admitted they would consider. Meanwhile, a third claimed they would cut back on all non-essential and some essential spending in order to still be able to afford their mortgage.
Perhaps the key for homeowners is to be prepared. If you have an SVR or tracker mortgage and you’re worried about how you would cope if rates rise, carefully work out whether you could afford a 3% increase.
If you don’t think you could manage, it might be worth seeking the advice of a professional mortgage advisor to find out if switching to a fixed rate mortgage might suit your circumstances better. While these can be less competitive when rates are low, they provide security and peace of mind because whether rates rise or fall they will stay the same.
By preparing now, any interest rate rise in the future may not come as quite such an unpleasant surprise.