This week I was asked by a national newspaper how mortgage borrowers should prepare for an interest rate rise. This was sparked by Mark Carney, The Governor of the Bank of England, hinting that interest rates could go up before the market expected them to. With markets now pricing in the possible first interest rate rise by the end of 2014 what should mortgage borrowers be doing now to prepare their finances? Below I lay out 7 steps they should think about taking:
Preparing for an interest rate rise
Keep abreast of when the market thinks there will be an interest rate rise
I provide a continually updated roundup of the latest interest rate predictions, which details when interest rates are likely to go up. Make sure you bookmark it, or better still sign up to my newsletter and receive updates into your inbox. Next.....
Read the small print on your mortgage deal
Around two thirds of mortgages are on the lender's standard variable rate (SVR). People need to find out what rate they are currently paying and the power that their lender has to change it. A lot of mortgages taken out before the financial crisis have a cap on how much the SVR can be raised above the Bank of England base rate. But many more recent mortgages don't. So find out how your mortgage rate could potentially be hiked by your lender. Next.........
Stress test your mortgage
Mark Carney has hinted at interest rates rising slowly once they start going up. Historically the base rate has been around 5%, although Mark Carney has suggested that in the next few years we are likely to see a base rate of nearer 3%. Here is a mortgage calculator where you can test how much your monthly mortgage repayments will go up by with each incremental rise in the base rate. So test how your finances will be impacted by an interest rate rise.
Think about fixing your mortgage
Those with equity in their homes should look to secure a long term fixed mortgage now, if they are already thinking about fixing in the near future. Demand for fixed rate mortgages is now increasing so people need to act quickly before the best deals disappear and lenders start putting up the rates on their best deals. Also those people thinking or remortgaging to build loft extensions etc (because they can't afford to buy a bigger house) might want to make enquiries now.
Speak to a mortgage broker
With the advent of the new MMR (Mortgage Market Review) and stricter lending criteria finding a good mortgage deal is only the first part of the process, the trick is securing it. This is where a good mortgage broker can be worth their fee. If you don't have a mortgage broker you can request a free mortgage review* from a vetted FCA-regulated mortgage professional.
Pay down debt
It's not just mortgages that are affected by the bank of England base rate - so too is interest on debt such as credit cards. For example, The Halifax recently changed its terms and conditions on its range of credit cards so that any base rate rise will be directly passed on to clients.
Start budgeting & saving
Consumers are going to start to feel a new squeeze on their finances when rates go up. So start budgeting now and assessing where to cut bills to make your money go further and build a savings buffer fund if you can.
