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Rising interest rates – what it means for your mortgage and what you can do about it.

It’s been a turbulent couple of weeks for the UK’s financial market.

The turmoil began on 22 September 2022, when the Bank of England raised the interest rate to 2.25%  – the highest rate since 2008.

The following day, the mini budget took place. The new Chancellor, Kwasi Kwarteng, proposed several changes to the tax regime – the basic rate of income tax was to be cut to 19p, the 45% top rate was to be scrapped (something he later cancelled), the 1.25% rise in national insurance was reversed, and the proposed rise in corporation tax binned.

The financial markets reacted badly to the proposed tax cuts, with the value of the pound dropping against the dollar, reaching its lowest point in 37 years.

The interest rate rise, along with the drop in the value of pound, prompted several mortgage lenders to remove their products from the market in order to re-price them. Lenders including HSBC, the Post Office, the Yorkshire Building Society and Virgin Money withdrew deals for new customers.

The pound has since bounced back and mortgage lenders have put their products back on the market – although at higher rates – but it is still an uncertain time for the economy. Experts are predicting that the Bank of England will increase rates further in November, in order to combat the continued rise in inflation, and some economists are predicting that the base rate will be as high as 5.8% by April next year.

1. What will the interest rate rise mean for my mortgage?

If you’re on a tracker mortgage, you’ll see an immediate increase in your payments. For those of you on a Standard Variable Rate (SVR) mortgage, it’s likely that you will see your monthly payments go up, but that will depend on when your lender decides to put up the rates, and by how much.

If you’re currently on a fixed rate mortgage, you won’t be affected for the foreseeable future. You won’t see your monthly payments rise until you come to the end of your deal.

If you’re a first-time buyer, or at the end of your current deal and looking to remortgage, then you’ll be facing the prospect of higher rates and more expensive monthly payments when you take out your new mortgage.

2. How much will my mortgage cost?

The rate for a typical 2 year fixed mortgage is now just over 6%. To give you an idea of what that means to monthly payments, if you had a £200,000 mortgage over 25 years it would now cost you around £1297 per month.

Martin Lewis, in his Money Saving Expert newsletter, gives this rough guide to working out how much your mortgage payments might go up: “For each 1 percent your mortgage rate increases, expect to pay £50 more per month per £100,000 of mortgage debt.”

3. How else could this affect me?

Unfortunately, the rise in interest rates could have a wider effect on the housing market. More expensive mortgages could mean that many people will be unable to afford the monthly payments – especially with the rise in the cost of living – and will postpone or cancel their plans to buy a house. This will have a knock-on effect on house prices – as the demand for property falls, so will the value. Experts at Credit Suisse are predicting that house prices could fall by 10% – 15% over the next 18 months.

The rising interest rates don’t just apply to mortgages –  it applies to unsecured debts such credit cards, personal loans, store cards and car finance. In response to the base rate rise, lenders could increase the rates on their products, meaning that new deals will be more expensive. It’s also possible that credit card providers will raise the rates for existing customers, which will mean higher minimum payments.

4. What can I do about it?

With all of the uncertainty, it’s understandable if you’re worried about what could happen. But there are some things you can do…

Remortgage before rates climb any higher

If you’re on a tracker or standard variable rate mortgage, or are coming to the end of your current fixed rate deal within the next couple of months, then now is the time to start looking for a fixed rate mortgage before rates get any higher.

A fixed rate will give you stability and some peace of mind during these uncertain times. Fixed rate deals are most commonly available for 2, 3, 5 and 10 year terms. The term that’s most suitable for you will depend on your own personal circumstances, your thoughts about future interest rate rises, and your long term objectives and plans.

If you’re in a fixed rate deal and have several months before you can exit it without paying any penalties, then it still might be worth thinking about whether it’s better to pay any early repayment charges in order to fix a new rate now. No one can know for sure where interest rates might be in the next 6, 9, or 12 months – it could be worth remortgaging if the savings you’ll make outweigh the costs of any penalty charge.

Assess your finances 

With everything that’s going on, now is a good time to assess your financial situation as a whole, not just your mortgage.

As we mentioned above, the rise to the base rate is likely to mean that banks and credit providers will increase their rates, too.

If you have fixed term credit, such as personal loans, then a rise in the rate won’t affect you – unless you’re planning to refinance the loan. If that’s the case, then you could find that the rate on your new loan is more expensive than you hoped.

If you have revolving credit, such as store cards or credit cards, then an increased interest rate will make your borrowing more expensive, and will mean higher minimum payments.

Take a good look at your credit commitments and ask yourself how you would cope if the interest rates – and the monthly payments – went up. It could be worthwhile consolidating some of those debts as part of a remortgage.

Speak to an adviser

If you’re looking for a remortgage, then you can speak to your current lender directly or shop around other banks and building societies yourself, but the best approach is to speak to an experienced whole of market mortgage adviser.

An adviser can often find you the best deals from a wider range of lenders, and can save you a lot of time and legwork. If you’re still in your current fixed rate deal and are wondering if it might be better to exit your deal early, they can take a look at your situation, check the figures, and work out if it’s beneficial for you to do so.

As well as advising you on a new mortgage deal, they can also look at your existing insurance and protection policies, to make sure they are suitable for your circumstances.

Your adviser can also look at debt consolidation, which can be a useful way of getting rid of expensive personal loans and credit cards while reducing your outgoings.

If you’re struggling, get help

If you are having trouble paying your mortgage, loans, or credit cards, or are struggling to pay for essential items like food and heating, then don’t suffer in silence.

Speak to your mortgage lender, bank or credit card provider to let them know you’re having problems, before you start missing payments or defaulting on your accounts. Lenders don’t want to see people in financial difficulty, and there are several things they can do to help, such as freezing interest and charges, giving you a payment holiday, extending the term of your loan, or putting your account on an arrangement with reduced payments. These things can have an effect your credit profile, but that’s better than having a County Court Judgement or facing repossession.

There are also several charities that can provide advice and further guidance:

5. Speak to Dragon Finance.

If you’re ready to remortgage or are thinking about consolidating debt, contact us and speak to one of our qualified whole of market mortgage advisers today. We’ll look at your situation and give you the best advice for these uncertain times.

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