What will happen to mortgage repayments when interest rates rise?
In March 2009, The Bank of England took the drastic step of lowering the base rate to 0.5% in March 2009. It has remained there ever since. The time has come for the prospect of an interest rate rise which will impact on all things property.
The currently policy has afforded buyers the opportunity to borrow money at historically low interest rates. Throw in the competitive nature of the British banking industry and there are some very favourable mortgage deals to be had. However, such a luxury is to disappear soon.
While the Bank of England have publically rejected the idea of announcing a date in the future for interest rates to change, the very fact the cost of borrowing has been unchanged for nearly 80 months surely will change into 2016.
These cheap deals have significantly contributed towards the increasing house prices seen throughout the country, particularly in the South-East and London. While the exclusive streets of Kensington and Chelsea are awash with luxury interior designers, savers have been penalised whose returns have diminished to next to nothing. Questions are beginning to surface as to what will happen to your mortgage payments when interest rates rise?
It is widely thought that an increase will be introduced incrementally. A rate of approximately 0.5% per year is expected reaching half the historic average of 5% by 2018.
Will my mortgage payment increase?
Analysing 3 situations based on loan-to-value ratios of 90%, 75% and 60%, there will be some significant repercussions felt. Taking into account the best available variable market rates and the incremental increase of 0.5% per year, the biggest increase in monthly mortgage payments will be those with the largest loan of 90%. Borrowing could increase by as much as £500 as the rate hits up to 5%. For those at 75%, the increase would be £400 and at 60% potentially £300. While these projections are subject to confirmed interest rises, there dramatic rise will no doubt impact many families and homeowners.
What is less certain is whether any interest rises will coincide with real wage growth and greater job security. Despite the Bank of England’s prediction that interest rates would rise slowly, mortgage borrowers should be prepared for the possibility that rates could rise faster so it is best to forewarned.
What is causing all this uncertainty is record lows across numerous indexes. The Consumer Prices Index, the common measure of inflation fell to 0% in June 2015, and the cost of a barrel of crude oil fell below $50 which is its lowest point since April 2015. There are problems in the global economy caused by the ongoing crises surrounding Greece, the falling Chinese stock market. Nevertheless, the outlook for the United Kingdom is looking bright. We have seen unemployment decrease significantly and wage growth has not been sufficient to risk any rash change in inflation.
With mortgage rates no doubt to increase, there is a rationale suggesting that fixing a rate isn’t the most sensible thing to do. Back in May 2010, many experts forecasted that interest rates would rise to over 3% by 2013, yet it has remained at 0.5% since March 2009.
Instead of predicting when and what interest rates will do over the coming weeks and months, it is wise to consider the risks you can afford. If any budget cannot accommodate an increase, a fixed rate is sensible so that a predictable future can be clear. Ultimately, any fixed-rate mortgage can limit your flexibility with being contracted to a lender for potentially 5 years. If you are a buy-to-let investor, fixed rates are more attractive. Holding onto property and renting long term can help fix the cost of finance over a period of time with steady returns generated.
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