Impact Of Rising Interest Rates On Mortgage Cost
It has been so long since interest rates moved in Britain, that many people on variable rate mortgages are in danger of forgetting that interest rates could soon move, with the knock-on impact that has for mortgage rates.
When interest rates go up, this can have quite a significant impact on monthly repayments, taking them up notably. Therefore if there is a series of interest rate rises as the economy does better, then this can lead to significant enough increases that people really feel it on their mortgage repayments going up to levels they could even find tricky to repay.
Because interest rate rises have this impact, it is worth trying to save money while interest rates are low for when they are higher, so that you have a cushion. Although psychologically it can be hard to find the discipline to save money - particularly when interest rates are low which is considered bad for savings but good for debt - however building a nest egg can mean you have that cushion in place as and when rates do go up.
You might like to use a mortgage calculator online to find out what the impact of a rates rise would mean for you: what would the difference between an APR of 3% to your payments versus one of 5%, and how readily could you make up the increase in the mortgage?
The other alternative is, when interest rates are low, to make regular overpayments on your mortgage. For instance if you took out the mortgage when the rate was 2% higher than it is now, you've been paying considerably less recently than when you took out the mortgage. What you could do is always act as though you were paying 5% by saving that monthly reduction then once a year making an overpayment: NB before doing this you will need to make sure it makes sense: for instance are there fees to be paid if you make an overpayment: check your mortgage literature carefully to see if you incur a fee by making an overpayment or contact your bank / building society as relevant.
A mortgage is not something that you simply take out when you require it, and then simply forget all about. Many people actively manage theirs, and look to move from one provider to another - remortgage - over time. As a minimum, you should always be questioning what might happen to your monthly repayments over time, and whether you will be in a position to cover the extra payments if interest rates should go up. By proactively checking on and managing your mortgage balance, you can help to prepare for any shocks to the system as and when interest rates do go up without suddenly having to go into a panic about where you are going to find the money from to cover the additional cost if interest rates go up.
It can be quite hard to think in concrete terms about abstract notions such as interest rates and what they actually mean for you, but when you have such a large sum of money to pay as is the case with a typical mortgage, then even a small change in the interest rate can be significant for your payments. The interest rates tend to move by a quarter of a percentage point at a time, or 0.25%. Whilst 0.25% may not sound like a lot, each increase on your mortgage repayments can be significant so it is best to plan for rate rises whilst they are low.Last update: 07 May 2015
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