How the rise in interest rates will affect you and your mortgage

The Bank of England has announced a 0.25% rise in interest rates in the UK.

Interest rates now sit at 0.5 percent, which is the second increase in seven weeks after the rate rose from 0.1 percent to 0.25 percent in December 2021.

This came on the same day that Ofgen announced that the energy price cap will rise by 54 per cent, affecting around 22 million homeowners in England, Wales and Scotland.

As the cost of living crisis mounts, millions of households can now expect to pay more in their monthly mortgage payments.

READ MORE: Simple ways every household can cut their energy bills by over £700 a year

The Office of Mortgage Counseling has now explained how the interest rate change will affect you and your mortgage, and what homeowners should consider doing to help manage their payments.

Consider securing a fixed rate mortgage

Depending on the type of mortgage you have, you may or may not be affected by the interest rate increase.

“Homeowners whose mortgages are directly tied to the bank rate may see an increase in monthly payments,” explained Brian Murphy, director of loans for the Office of Mortgage Counseling.

“Those who have Lender Reversal Rates or Standard Variable Rates (SVRs) will have to wait and see if their lender will pass through the rate increase in full or just part of it.

“Those who have a rate-tracking mortgage are more likely to see the rate transferred in full, and possibly as soon as their next mortgage payment.

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“A fixed-rate mortgage could provide a temporary safe haven against upcoming interest rate increases, since your fixed interest rates are guaranteed for a set period of time.

“If you’re remortgaging, be sure to talk to your lender about the terms of your mortgage, as there may be exit fees or prepayment charges to consider.”

move quickly

Any change in interest rates can affect the real estate market and therefore what mortgage deals are offered and for how long.

“The sooner consumers act, the more likely they are to lock in a rate close to the lowest levels in history,” says Brian.

“For most people, a new mortgage is a fairly straightforward process and certainly not something to fear.

“Similarly, for those nearing the end of their current fixed-rate mortgage agreement or considering new loans, it may be helpful to contact a broker or lender to start the process sooner rather than later to ensure a competitive deal.” .

Find the best deal

For first-time buyers or those looking to remortgage, it’s important to look around to see where the best deal is on offer.

“A mortgage broker can help you find the most suitable offer for your circumstances and take into account the real costs,” said Brian.

“It’s important to not only think about the overall fees, but to also assess any additional fees that may be involved.”

Calculate what you can afford

Creating a budget based on your income and expenses will help you see areas where you can potentially cut back and save.

“Budgeting can help increase your deposit or assess whether you can overpay your mortgage,” Brian explained.

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“It can also help you build a savings cushion in case unexpected financial costs or bills come up in the future.

“A mortgage advisor can also help you with budgeting and affordability – this will be the first thing they look at to make sure you can afford your mortgage payments now and in the future.”

To help calculate your monthly mortgage payments or even your total monthly expense, you can use a mortgage payment calculator or budget calculator.

Overpay your mortgage whenever you can

As mortgage interest accumulates on the full amount of their mortgage throughout the term, homeowners may consider overpaying to reduce the amount on which interest is charged.

“Doing this can help not only pay off your mortgage debt faster, but it will also save you money in the long run,” Brian said.

“For example, if you have a 25-year £100,000 mortgage at a 4% interest rate and pay an extra £100 per month, you could reduce the term of your mortgage by six years and save £15,534 in interest.

“Keep in mind, though, if you can overpay on your mortgage without penalty. An easy 10% overpayment per year without incurring penalties is fairly typical for many products.

If there is a prepayment fee, it’s worth talking to your mortgage advisor to see if the overpayment fee outweighs the other benefits of making overpayments.”

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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