– Just around the corner?
When will interest rates rise? How many times have we heard that question since 2008 and the onset of the ‘Credit Crunch’? The Bank of England base rate has been at 0.5% since March 2009 and for the last 12 months the Governor of the Bank England Mark Carnie, has told people to start preparing for an increase to rates. Bank of England figures indicate there was a very slight upturn to average mortgage rates a couple of months ago but as the chart to the left indicates, both 2 year and 5 year fixed rate mortgages are at historical lows since March 1995.
On that basis, if you have a mortgage maybe it is time to review it? This might be to secure a really competitive rate at this time or perhaps to provide you with peace of mind. Whether you move to another mortgage deal depends on your circumstances and the existing deal you have. 5 year fixed rates are about 2.5% at the moment and a 2 year fixed rate at about 1.2%. Some are even cheaper where the loan to value is low or where a deal has a low interest rate but higher mortgage fees.
Of course fixed rates are not the only type of mortgage. Many people are on the lender’s standard variable rate and some are on discounted variable rates. They may be perfectly happy with these arrangements and not concerned about paying more for their mortgage each month as interest rates start to increase. Some might have a tracker rate that still provides brilliant value – even if rates do start to increase.
Another reason for ‘staying put’ might be the inability to secure a new mortgage deal. If it has been some years since they last changed their mortgage, they may now struggle to meet their mortgage lender’s current criteria for affordability.
Stress Test your Mortgage
If you owe £200,000 on a repayment mortgage over 20 years, an increase from 3.5% interest to 5.5% would change your mortgage payment from £1,160 to £1,376 per month; another £216 per month to find. There are numerous online tools to work out the impact to you personally. Either that or seek advice from an advisor who will be able to help you.
So some might stay with their current deal, some might move to a new one, but with a rate rise anticipated in the next 6 months, you need to at least ask yourself if your current mortgage deal is appropriate and test your ability to withstand an increase in payments.
Graph shows BOE average mortgage data (April 2015) for 75% loan to value.
Author: Phil James, Grosvenor Consultancy Ltd
There are advantages and disadvantages to using all of these strategies and they depend on individual circumstances so don’t take action without seeking competent advice. Tax rules, rates and allowances are all subject to change. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested.
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