A new study has revealed that almost seven million borrowers would struggle with their mortgagerepayments if interest rates rose just 1%. It's particularly alarming news given that the experts predict that by this time next year, rates will have started climbing.
The research, for mortgage and loans firm Ocean Finance, found that in order to be able to afford the extra cost of their mortgage, 63% of people would have to cut back on all their non-essential spending - putting a stop to weekends away and meals out. However, 13% of people would not be able to cut their costs sufficiently, and say they would quickly get into financial trouble trying to make their budgets work.
Gareth Shilton from Ocean said: "It's inevitable that interest rates will rise at some point, whether that happens in spring next year or later in the year. Whilst the rate rise is likely to be gradual and it may take a while to get to a 1% increase, every rate hike will have an impact on hard working families who are already struggling to make ends meet."
What can you do?
The researchers found that in addition to cutting their costs to free up more cash for the mortgage, almost a quarter of those answering the survey said they had already switched to a fixed-rate mortgage, and 16% plan to do so in the near future.
This will certainly protect them for the following 2-5 years, but even with a fixed rate mortgage, the fixed period will eventually run out, and the cost of new deals is likely to be significantly higher.
It means that even those who have done all they can to protect their finances will not be protected forever. It's one reason why 10% of people said they would have to consider selling up in order to avoid paying more for their mortgage.
What about you?
If you have a typical standard variable rate mortgage, then a 1% rise in interest rates will cost an extra £55 a month for every £100,000 outstanding on the mortgage. The goods news is that if you have taken a mortgage out recently, then you will have already faced the question of how you would pay for this. Before you can get a mortgage nowadays you are forced to consider how you would afford it if interest rates rise, so you will have discussed the increased costs, and in many cases will have devised a strategy to pay them.
If you are on a fixed rate mortgage, it will also give you time to make effective plans for cutting costs in order to pay the extra monthly payments.
These plans will depend on how focused you have been on cutting your costs in the past. If you haven't shopped around for cheaper gas, electricity, landline, mobile phone, broadband and TV packages, then there's easily £55 a month to be shaved from the budget. If you haven't downshifted from branded groceries to the supermarket's own-brand - or downshifted altogether to a discount supermarket - then there's another £20-£55 a month you can save.
If you have already taken these easy steps, you may have to look at sacrifices in your lifestyle - such as ditching leisure activities, holidays, and expensive memberships and subscriptions. You should also consider downgrading your car.
After that, there are bigger sacrifices to consider, such as downsizing your property, moving to a cheaper area, or taking in a lodger.
But what do you think? Could you afford a hike in your mortgage payments, and how much would you have to sacrifice to cope with an interest rate rise? Let us know in the comments.
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