It may not be something you think about on a day-to-day basis but with
mortgage rates rising and the housing market threatening to top-out, there is a big financial question to be answered: Can your budget withstand interest rate boom and bust?
Basic instinct
The Bank of England’s base rate – which forms the starting point for the
rate of interest you are charged by your mortgage lender – is still,
historically speaking, very low. The rise in February was the second in
four months but before that it had been plain sailing for two years.
However, market experts predict that the base rate will continue to rise
steadily this year until it hits the 4.50% mark. Yes, really. And as many
potential homebuyers opt to ‘wait and see’ rather than trade-up, concerns
over the buoyancy of the housing market don’t help matters. So for
millions of people who borrowed more than they should have when interest
was low, now is the time to consider the impact of future rate hikes.
Cold, hard cash
So when your mortgage lender passes on the cost of rise in interest rates
to you, what is that likely to mean in pounds and pence? Even a
half-percent increase has made a dent for many people. ‘Borrowers with a
£100,000 variable mortgage will have seen their monthly payments rise by
approximately £30 a month in the last four months,’ explains David Bitner
of independent finance experts The MarketPlace, Bradford & Bingley. ‘But
many can easily do something to cut this cost,’ adds Bitner.
If you are not sure how much fat there is in your monthly budget then it
will take just minutes to get a clearer picture. Deducting every scrap of
your monthly outgoings from your income will reveal how much ‘disposable
income’ you have. £30 may not put you on the breadline but it has to come
from somewhere and pretty soon you may need to find and more and more every
month to meet your mortgage – undoubtedly the most important debt you have.
Apart from getting more control over your cash, there is also the principle
of not paying more than you have to for anything.
Immediate action
So what can borrowers do to beat the base rate? For starters, if you are
lazy enough to pay your lender’s standard variable rate (or SVR) – which is
usually the most expensive and has absolutely no frills – then you are
throwing your cash away every month. But amazingly, one out of every two
homeowners surveyed by The MarketPlace said they would not consider their
remortgaging unless interest rates increase by a full one percent or more.
Almost two thirds said they would not be concerned about increases to their
mortgage repayments until they had risen by more than £50 per month. And a
very relaxed 35% of those asked said it would take an increase of more than
£100 per month to spur them into action.
While others are happy lining the pockets of their lenders, smart borrowers
are shopping around for the best possible deal to keep their costs to a
minimum.
Consumer campaigners at ‘Which?’ are also on the case. They believe many
mortgage lenders are taking advantage of customers’ inertia and charging
longer term customers high rates. Which? has calculated that customers on
standard variable rates could save an average £475 a year by switching
their mortgage. Melanie Green, principal researcher at Which?, says:
‘Don't take this rate rise lying down. If you're paying the standard
variable rate, you can switch cheaply and easily and save hundreds of
pounds rather than putting up with paying even more to your lender. There
are lots of lenders out there who want your business and many will prove it
by waiving some or all of the costs of switching.’
‘We estimate that at least one-third of borrowers are currently paying a
lender’s standard variable rate,’ says Bitner. This "wait and see" attitude
is costing borrowers at least £2.5 billion a year. On an £80,000 mortgage,
a one per cent saving from a typical SVR is worth £45 a month (£540 a
year). Bitner continues, ‘Those borrowers not fixed into a deal should
look to counter the increase in their monthly payments, by shopping around
for a cheaper deal – it’s common sense. It’s staggering how many of us
demand value for money from everyday purchases, yet still ignore the chance
to save money on the largest financial commitment that most of us have.’
Ray Boulger of Charcol agrees: ‘We’d urge all borrowers, particularly those
taking out a discount or tracker deal, to ensure they leave a comfortable
margin for the cost of their monthly repayments, in the event of future
rate rises.’
More articles by Sarah Modlock
