If interest rates were to rise by 1% next week, would you still be able to afford your mortgage payments?
What if they went up by 1.5%? Or 2%?
Not sure? Maybe you should check out a mortgage calculator to know where you stand.
The last five years or so have seen UK homeowners with tracker mortgages enjoying an incredibly favourable interest rate. In fact it has remained at 0.5% since the time of the global economic crash, a record low. And of course a low interest rate means a lower monthly mortgage repayment.
But this situation can’t last forever. In August, two of the nine members of the Bank of England’s Monetary Policy Committee voted in favour of a 0.25% rise to 0.75%. The other seven ensured the interest rate stayed where it was, but this was the first difference of opinion in several years, meaning that opinion is beginning to waver on whether the policy needs to change. And when that happens, not if, then the impact on UK borrowers, especially homeowners, could be significant.
Because although 0.25% might sound fairly insignificant, when you apply it to huge sums owed for mortgages, it can put a lot of strain on household expenditure.
Let’s look at one example.
A £400,000 home, bought with a £50,000 deposit, requires a £350,000 mortgage. Spread over 30 years, with a 0.50% rate of interest, the monthly payment is around £1,050. Not cheap, but certainly manageable for many families.
But if the interest rate changes to 1%, the monthly repayment rises to £1,125, over £75 more. That’s a big chunk out of most household budgets, money that might be needed to pay for bills, school clothes, fuel or food.
Should the interest rate climb as high as 2%, admittedly not too much of a concern right now, then repayments on this home would be almost £1,300 every month. That’s going to cause a lot of families to struggle. And when you fall behind on your payments, you put your home at risk.
So it’s of incredible importance that anyone with a variable rate mortgage knows what they would likely be paying every month if rates rise, and prepare for that eventuality. Because in all likelihood it’s not going to be long before there is an increase, and that can force you into debt if you’re not careful. Many families are living from payslip to payslip already, with the cost of energy bills ever-increasing, so having a good idea of where they stand is essential.
It’s a similar situation for anybody looking to take out a mortgage. Would you be better with a fixed rate mortgage instead? You may well end up paying a bit more over the life of the contract, but at least you will have a flat, predictable monthly payment and not have to keep worrying about what the interest rate is going to do.
If on the other hand you want to take a risk and go with a tracker mortgage, then you need to be asking yourself how much you can realistically afford to borrow. If you take on too much, and rates go up, then you may well lose your home. The market will have shrunk as well in that case, and you may find it harder to sell if you have to.
Some homeowners will be lucky, and be able to transfer their tracker mortgages to fixed rate mortgages before they hit problems. Others will not have that option. And to anyone facing that situation, the worries will quickly build up, which can affect mental and physical health, relationships, and jobs.
If you’re concerned about an interest rate rise and the impact it could have on your ability to meet your mortgage repayments, or that you may be pushed into debt, then it’s critical to seek professional financial advice before things get worse.