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How to Protect Against Rising Rates

Interest rate rises must come eventually. Here are some ways you can prepare for when mortgage costs start to lift.

May 22, 2014

With Base Rate at a record low for the last 5 years many borrowers have been enjoying low mortgage payments.  However, there is little room for complacency and the only thing that is certain is that interest rate rises must come eventually.

There is though time for borrowers to prepare for the point when their mortgage costs start to lift.  So what can you do?

A good starting point is to check what rising rates could mean for your monthly payment and how that might impact your monthly budgeting.  Use the online rate change calculator to see what different scenarios would add to the monthly cost.

The most obvious course of action is take cover and batten down the hatches.  Switching the mortgage to a fixed rate will lock the mortgage down and give the borrower a period of budgeting certainty.  Locking in at the low means that they not only have peace of mind but might even cut the current mortgage payment.

However fixed rates have been gradually lifting already, as market expectation of an increase in Base Rate draws nearer.  Despite that there are still some extremely attractive fixed rates with 2 year deals available below 2% and 5 year fixes from around 3%.

Those that are hesitant in abandoning a currently low standard variable rate can still take positive action to better prepare for higher rates.  Overpaying will help to drive down the mortgage more quickly whilst interest rates are low, which will mean a smaller mortgage balance as rates rise.

If sticking with a variable rate, remember that fixed rates will have already increased before Base Rate does move, as the markets anticipate the change.  However, even those electing to fix now are likely to have some flexibility to overpay without incurring an early repayment charge, typically 10% of the outstanding mortgage balance.

The most vulnerable borrowers are those that do not have mortgage options, for example because they have little or no equity in the property.  Some lenders will offer existing borrowers the chance to move onto another deal with them, even if they are in negative equity.  Although the rates may not be the keenest it could at least give the opportunity to fix the rate.

Tougher affordability criteria may also make it harder for some to switch but lenders do interpret the rules differently.  Just because one lender will not offer the required amount doesn’t mean that another won’t be more flexible, so it still pays to shop around.

David Hollingworth
London & Country Mortgages

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