What to do when your mortgage rate rises
Filed under: Mortgages
So should you be worried, and what can you do?
Mortgage Advice & Info
The risesThe figures have revealed that the average rate on a mortgage that's fixed for two years is now 4.15% - up from 3.82% six months ago. Similarly, five year fixed rates hit a low in January this year with an average rate of 4.57% but this has crept up to 4.72% - adding an extra £12.81 per month.
For two-year trackers, the average rate has gone from 3.37% eight months ago to 3.63%, adding an extra £20.91 per month or £250.92 over the year.
Mortgage Advice & Info
These come alongside rises in SVRs, which come into effect in May. Around 1 million customers will be affected by these increases announced by providers including Halifax, Co-operative Bank, Bank of Ireland and RBS/NatWest. Overall, the average increase to SVRs is 0.62% which will add an extra £52.58 to a £150,000 mortgage or £630.96 over the year.
Shop aroundThe comparison site warns that this trend has further to go, so says it's essential we shop around for a mortgage deal as soon as possible, to secure a deal before it expires.
Clare Francis, mortgage expert at MoneySupermarket.com, said: "Borrowers paying their lender's SVR should also reassess their mortgage arrangements. One of the consequences of the low base rate has been the fact that SVRs have been similar to the rates on new mortgage deals and in some cases the SVR has been even lower.
"As a result an increasing number of people have opted to stick with their existing lender and move onto the SVR when their fixed or introductory tracker or discounted period ended, as opposed to remortgaging elsewhere. However, as around one million borrowers are about to find out next month, many SVRs can rise even if base rate doesn't."
What you can doThe first step is to make sure exactly what rate you are on. This won't necessarily be on your mortgage statement. You may need to revert to your original documents, and any letters you have received since. If your filing isn't flawless, your best bet is to call up and discover the terms of your deal, including your interest rate - and whether you have to pay penalties to switch at this stage.
If you are one of those affected by a rate rise on your SVR you can check your original documents to ensure they are within their rights to increase the rate whenever they fancy it. However, this tends to be the case, so most of the time you either have to live with it or shop around.
Once you know where you stand, you're in a position to visit a comparison site or two and plug in your details for a rough idea of the sorts of things that are available. In the final analysis, you may want to use a mortgage broker, who will hep you shop around for the best deal, and secure some of the most competitive ones on the market. However, only you will know if your mortgage is hefty enough to make a broker worthwhile.
As Francis points out, the kind of deal you opt for will depend on your own concerns and priorities. She says: "Economists are expecting base rate to remain at 0.5 per cent for the foreseeable future. A lot of people may therefore be happy to opt for a variable rate mortgage. Tracker mortgages are directly linked to base rate, so any changes directly mirror moves in the Bank of England base rate. This is different to discounts which are linked to the lender's SVR, so given the forthcoming SVR increases; a tracker is a safer option.'
On the other hand, she says, "If the prospect of higher mortgage repayments worries you, a fixed rate deal will give you peace of mind and protect you from interest rate increases for a set period of time."
Some are stuckOf course, all this assumes that you have the income and equity in your home to be able to secure another deal. There will be plenty of people for whom there is no alternative but to stick with their current lender. It's well worth talking to them, or a broker, to see if you can switch without having to pass more affordability tests.
If you can't switch at all, your only option is to plan for the increases. You need to know how you will change your spending habits and lifestyle to afford to extra cost, rather than just getting into more debt and hoping it will get better all by itself.