Interest rates are on the way up and with further increases expected, it makes sense to think about ways you might be able to protect yourself from potentially steeper mortgage payments. Analysis by L&C has shown that mortgage rates have risen rapidly over recent months, with the average of the UK’s largest lenders’ remortgage 2 year fixed rates sitting at around 1% higher than in October of last year, while 5 year fixes have increased by 0.92%. The Bank of England’s Monetary Policy Committee (MPC) voted to increase the base rate from its record low of 0.1% to 0.25% in December last year. It raised it again in February by quarter of a percentage point to 0.50%, the first time the base rate has increased at two consecutive MPC meetings since 2004. And there could be more to come. Here are some of the steps you may want to consider taking to help reduce the impact of any further increases.
• Work out whether a rate rise will affect you
The first thing you should do is to check the details of your current mortgage. If you’re tied into a fixed rate mortgage, for example, then – at least for now - you will be protected from any increases in the base rate. If you’re on a variable rate mortgage, then your mortgage payments will almost certainly increase when the base rate goes up. If you have a base rate tracker mortgage, then your rate will rise in line with any increase announced by the MPC. If you have any other type of variable rate mortgage, it will be up to your lender to decide how much of any increase in the base rate they want to pass on.
• Can you afford higher payments?
It’s a good idea to work out how much more you’ll pay each month if the base rate goes up. This can help you avoid any nasty surprises when it happens and also gives you a chance to think about how you’ll cover higher monthly costs. Our Mortgage interest rate calculator can help you work out what effect a base rate increase could have on your monthly payments. All you need to do is enter your current mortgage rate, type and term length and how much you think rates are likely to go up by, and the calculator will tell you how much extra you’ll have to pay. It’s worth seeking advice from a mortgage broker too. They will be able to advise whether it’s best to leave your existing deal early if there are much cheaper deals available elsewhere, or whether you should stay put until your current deal ends.
• Make sure you’re on the best possible deal
If your mortgage deal is finishing soon, make sure you start looking around for a new deal as soon as possible if you want to take advantage of today’s low rates, as if the base rate rises, these deals are unlikely to hang around for long. You can usually lock into a new deal three to six months before your current deal ends. Doing so means you should be able to move onto your new rate smoothly, without falling onto your existing lender’s costly standard variable rate first. If you’re not sure how much you could save by moving onto a new deal rather than sticking on your lender’s SVR, our Cost of doing nothing calculator can help you work out the potential savings.
• Boost your credit score
Even if you’ve got a while before your current mortgage deal ends, it’s still sensible to look at ways you might be able to improve your credit score. This will give you the best possible chance of remortgaging to a competitive deal later. As well as ensuring you make any debt repayments on time, taking simple steps such as making sure you’re on the electoral roll and closing down credit accounts you no longer use could make a difference. Find out more in our guide Advice on How to Improve Your Credit Score
• Make overpayments if you can afford to
One of the best ways to keep your monthly mortgage payments down is to try to reduce the amount you owe as quickly as possible, if you can afford to. Most lenders will allow you to repay up to 10% of your mortgage balance a year without penalty, so if you do have any spare cash available at the end of every month, it may be worth using some of this to make overpayments. Our Mortgage Overpayment Calculator can show you how overpayments could help save you interest and reduce your mortgage term.
