How rising interest rates affect your mortgage and savings

Over the past 6 months The Bank of England has increased their interest rates multiple times. These increases will affect many households across the UK for people with both mortgages and savings, with some experts estimating that 2 million households will be affected. In June, the Bank of England base rate increased from 1% to 1.25% and this increase was quite a big compared to others in previous months. With mortgage approvals from the bank still around 70,000 per month, many people will be affected. Keep reading for everything you need to know about how the changing interest rates could affect your mortgage and savings.

Variable rate mortgages

Households that will be affect the most are those who are on variable rate mortgages. A variable rate mortgage means that the interest on your home loan is not fixed. Some homeowners decide to opt for a variable rate mortgage as usually the interest rates are lower than that of a fixed rate mortgage. It also means that if interest rates fall during your contract, the amount of interest you pay will too decrease. Of course, the negative side of these mortgages as we are now seeing is the fact that if interests rates rise so too will your repayments. With the current changes, mortgage repayments could be costing home owners nearly £200 more per month or £2000 across the year. So, what should you do if you’re in this position? The key to a variable rate mortgage is to be prepared. If you can, it may be a good idea to overpay on some mortgage payments and take advantage while rates are lower. Think about working to improve your credit score so that when your rate ends you will be able to get a better deal. Make an effort to cut back on expenses such as overdrafts and change any credit card balances to a 0% offer. If down the line you do enter a variable rate mortgage you will have to carefully examine and manage your finances. You should be able to budget and have some leeway each month in case of interest rate increases and as always speak to your mortgage advisor to find the best deal for your finances and lifestyle.

Fixed rate mortgages

In general, having a fixed rate mortgage is a safer way to go if you are worried about rising interest rates. With a fixed mortgage you will pay the same interest rate across the term of your loan and as a result your monthly mortgage repayments will stay the same. This is the best option if you have a strict budget to stick to and want to be able to rely on predictability. With a fixed rate mortgage, you will remain unaffected by rising interest rates until your term comes to an end. At this point you should seek advice from a mortgage expert to find another deal that is suitable and affordable for you. As a result of the rising interest rates, we are likely to see a boom in remortgaging. Remortgaging may mean that you can get a better deal or look for a long term fixed rate. It is also a good option if you don’t want to go through the upheaval of moving home but instead could release some equity to carry out work on your property.

Savings

As positive effect of interest rising is the effect it has on savings. With the increase you will find that your savings yield a better return but this will creep up at quite a slow pace. Do your research to see which savings accounts are offering the best deals but if you are looking to save your money for longer, you may be better off investing it in the stock market but as always this comes with some risk. The interest rate rises could be good news if you are saving for a deposit so meet with a mortgage advisor to see how close you are to a deposit and the likelihood of a mortgage being approved.  

If your mortgage has been affected by the rising interest rates get in touch for more help and independent advice from the team at GPD Mortgage Solutions.