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Mortgage Rate Rises Around the Corner


The national news has been more positive as of late with welcome evidence that the economy is ‘turning a corner’ and showing early signs of a sustainable recovery.

However, home owners should be aware that the news is not without a sting in the tail since as confidence grows the more likely it is that they should prepare for higher mortgage rates.

Whilst Mark Carney, the Governor of the Bank of England, is reassuring householders that the bank rate will stay at its record low level of 0.5% until at least 2016 when he expects unemployment to drop to 7%, market analysts disagree arguing that the bank rate could rise a year earlier in 2015 or even next year, as unemployment fell from 7.8% to 7.7% in the three months to the end of July.

In addition the rise on government bonds, which dictates the cost of fixed rate mortgages, have soared.

Mortgage customers have enjoyed a long period of record low rates but brokers warn that fixed rates have now bottomed out and the only way is up.

There are some steps home owners can take to dampen the effect of mortgage rate rises as and when they occur.

Where you can afford to do so, you should consider making overpayments on your loan to reduce the capital outstanding on your mortgage upon which mortgage interest is charged particularly since savings interests rates remain poor.  Clearly the less you owe, the less interest you will be charged and the more likely you will be able to cope with a mortgage interest rate rise as and when it arrives.

By example, based on a £200,000 mortgage over 25 years at an interest rate of 4%, an overpayment of an extra £100 a month would clear your mortgage debt 3 years and 4 months early.

However, if you are currently in a fixed rate mortgage you should be careful that you do not exceed any cap on overpayments of the amount you can overpay on your mortgage since doing so may bring about a ‘repayment penalty’.

If you have finished a fixed or variable deal and are sitting on your lender’s standard variable rate, you should consider whether to fix now.  Brokers are recommending five year deals to get the most benefit from record low rates and since it is not expected that fixed deals will get any cheaper.  Of course, if you are looking to sell your property in the near future, this may not be the best way forward since fixing your interest rate could bring about a penalty payment on repayment of the mortgage.

If you are bound within a fixed rate, perhaps at a time when fixed rates were being sold at 4.99% it may be worth considering breaking out of the deal, paying the early repayment charge, and fixing at a lower rate.  Of course, whether this is a financially viable prospect should be determined upon your sums being correctly and carefully calculated since aside from the initial interest rate reduction and the resulting impact on monthly instalments, there would be costs associated with the switch including the new lenders fees, valuation, etc, and the legal costs associated with the change.

Offset deals have become popular over recent years.  These work by offsetting your savings against your mortgage loan, reducing the mortgage interest payable whilst the offset savings account earns no interest.  For example, if you have a mortgage of £200,000 but also have savings of £50,000, the interest payable on your loan would only be payable on the differential of £150,000.  Considering the extremely poor savings interest rates, this offers better returns.  Better still, your savings are instantly accessible should they be required.

Whilst therefore it is not possible to escape any imminent mortgage interest rate rises, there are ways and means of minimising its effects.

Should you require legal assistance in the remortgaging of your property from one lender to another, do not hesitate to contact either Liz Wallis, Alison Mason or Adam Fletcher at Ridley & Hall.

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