Ask the Expert: What steps should I be taking to counter the looming interest rate rise?
This week’s blog post takes a look at what if any steps should be taken by consumers ahead of the looming interest rate rise.
Q: What steps should I be taking to counter the looming interest rate rise?
A: We may not know when the interest rate rise is set to happen, but we do know that it IS set to happen, and if you spend some time now looking over your financials, you could ensure you are prepared and correctly positioned when it does.
While a relatively small increase in interest rates may not seem a big deal, when it comes to your mortgage, it can be.
For example, a one percentage rate rise on a typical £140,000 repayment mortgage with a current standard variable rate of 4.75 per cent will add £83 a month to your bill. That adds up to almost £1,000 a year!
What’s important as a first step is to check what interest rate you are currently paying on your mortgage and what type of mortgage you actually have – by this I mean fixed rate, tracker, standard variable. I’ve found that while some people know how much they pay in pounds on their mortgage each month, they don’t know the actual percentage rate or what kind of deal they are currently in place.
If you are not tied into to a deal and your rate is above 2%, you should definitely be looking to see if you can get a better mortgage product. However, before taking any action it is vital to check that you are not in the middle of a contract that has penalties for leaving or changing.
If you are not tied in to your mortgage and you would like to secure and lock in a monthly payment you need to take a look at fixed rate mortgages available: you can get access to two, five and even ten year fixed rate deals. The rate will increase as the length of the fixed period does but with rates at historic lows more and more people are locking themselves in for the long term. Remember less than a decade ago base rate was more typically around the 5% mark instead of 0.5%.
If you are fortunate enough to have enjoyed a very low mortgage rate now is a good time to try to put away some of the money you are not paying toward your mortgage to savings. Don’t forget to use up your ISA allowance for your first £15,100
According to savings website Savingschampion, saving rates have increased 10 per cent since June, and the predicted rise could see this set to increase further.
Of course, you will need to take a look around to see what is the best deal for you and whether or not you want to tie your money up for a longer term. – The longer you agree to leave your money the better the rate you will get. Having a back up or emergency fund is definitely a good idea if feasible.
Alternatively you might want to use the money you are not paying toward your mortgage to pay down some of your unsecured debt such as personal loans or credit cards. While this debt maybe very manageable now, as rates increase this may put more pressure on your monthly budgeting. If you can reduce this debt now it will be easier as your mortgage rates increases.
In summary try as much as you can to actively manage your finances thinking about now but always planning for what might come down the track in the future. Rates will increase at some point so try to be as prepared as you can to deal with it.