You may have seen mortgage and interest rates being mentioned in the news more than usual recently. And with rates on the rise, you’d be forgiven for thinking ‘what is happening?’, and ‘why are they rising at such a fast rate?!’
Well, interest rates rise due to the rising rate of inflation, which currently sits just below 9%. And for those of us who aren’t bankers or economists, you can tell just how far from good this really is when you know that the target is actually just 2%. Back in June this year, the Bank of England rose the interest rate by 0.5% to 5%. In August, it’s risen again, to 5.25%. That’s the 14th rise in a row, and here’s what our CEO has to say about it…
Chris Davis, CEO of MoneyPlus, said: “Another hike in interest rates is a great concern for many of the population and especially for those already facing financial hardship. Focus has switched from high energy bills to mortgage rates and rising costs of everyday items, including food, with people not seeing much light at the end of the tunnel. We’re living in a time of hypervigilance and the pressure on wages, household incomes, and expenditure is at a level many have not seen or experienced before. Those that are currently feeling scared and financially vulnerable may find it hard to make the first step towards facing their issues head on, while there are plenty who may not be fully aware of the longer-term impact. Avoiding the reality of financial pressures can be counterintuitive and the best practical advice we suggest is to face any issues as early as possible and seek help from an organisation who can offer debt advice on a full range of solutions. There is no shame in talking about money problems and challenges. Always speak up – that initial conversation is often the highest hurdle to overcome.
Why are mortgage rates rising?
There are more than a few factors that go into inflation rises, at the moment these might be the ongoing war in Ukraine or the economic impacts of the COVID pandemic, but whatever the cause, the effect is always that the cost of basic goods and commerce goes up, and its harder for the average person to make ends meet.
In an attempt to slow spending and bring demand down (this would reduce inflation), the Bank of England raises the interest rate to discourage us from spending money and encourage us to put our cash into savings. This, in theory, should bring down demand and with it, the rate of inflation.
Interest rates on loans, such as mortgages and bank loans go up, leading to higher repayment rates. And this, in short, is the reason that mortgage repayments are increasing, and why many of us are now finding ourselves with higher mortgage repayments each month.
Will mortgage rates go down?
While there are no guarantees on what could happen as the year goes on, analysts believe that the rate of inflation will begin to decrease.
If inflation drops enough, the interest rate will soon follow. The Bank of England reviews the interest rate eight times throughout the year and will either choose to raise, lower, or stay the course with the interest rate as it is, depending on the current health of the financial market.
Mortgage rate rises and debt
According to the Office of National Statistics (ONS), almost a third of people are now struggling to afford their mortgage repayments.
Following a year of particular pressure on households to borrow and take out further loans to keep up with the cost of living, the mortgage rate rises are likely to add further stress to our already stretched budgets.
For people already dealing with high debt repayments, the added costs of higher mortgage payments will likely create further unaffordability.
I’m on a fixed rate will the rises affect me?
If you are currently in a fixed-rate mortgage, then your repayments will remain fixed at the rate you entered the contract, for however long the fixed rate was agreed upon.
If this fixed rate is set for the next two-four years, the current rate rises will not currently affect your mortgage payments.
If however, your fixed rate is set to end soon you could start seeing a new higher repayment rate.
What happens if I’m unable to afford my new mortgage repayments?
If you’re worried about your new mortgage interest rate repayments, it’s important to reach out for help as soon as possible, either to your mortgage company, or a debt advisor.
Here are some steps if you find yourself unable to repay your mortgage:
Revise your budget: Before taking further steps it’s important to check in on what you’re spending, and where. Looking at everything in one place can help you to see where expenses can be cut. A regulated debt advisor can help you to see where you can make cutbacks.
Talk to your mortgage provider about alternatives: Lenders must treat customers fairly and with due consideration for their financial situation. What does this mean in practice? Well, by discussing your current financial situation and showing a willingness to repay any outstanding amounts, you should find that companies will be open to a repayment plan or alternative payment options that allow you to repay at a reduced rate, or over a longer period to spread out of your costs.
Mortgage Support Schemes: The government has introduced a mortgage support scheme to help homeowners facing financial difficulties. This scheme offers temporary interest rate relief to ease the burden of mortgage repayments during challenging economic times.
Mortgage Payments Holidays: Under particular circumstances or during times of economic uncertainty, mortgage providers may offer payment holidays to provide temporary relief for borrowers facing financial hardship. This gives certain borrowers a break from their mortgage payments to recover financially long enough to be able to repay consistently in the future. Not all mortgage providers have these options available, so you will need to check if your lender has this option before considering this option.
I have already fallen behind on my mortgage payments, what happens now?
If you miss two payments to your mortgage, the provider will consider your account ‘in arrears’. At this point, your bank will let you know how much you owe, and list out all missed payments, plus any charges they’ve added.
Lenders can’t repossess without making ‘reasonable’ attempts to resolve the arrears with you. In real talk, you must be given a fair amount of time and attempts of contact to repay your debts before, you’re at risk of losing your home.
At this point, it could be a good idea to get in contact with a debt advisor. Especially if you’re falling behind on other debts too. With professional debt advice, you can find the solution that will help you to get in control of your debts and look to find a solution that gives you the best chance of keeping your home.
Why is my mortgage interest rate higher or lower than the current bank rate?
While the Bank of England interest rate is the overall rate of interest in the UK, mortgage rates can vary depending on the agreed-upon terms. If your mortgage bank loan is set at 7%, when the Bank of England raises its interest rate loan providers will often raise their rates to cover the costs.
This means that when the interest rate rises, most existing mortgage rates will go up alongside it.
How can I protect myself from future interest rate rises?
To protect yourself from potential future interest rate rises, consider the following strategies:
Fixed-rate mortgages: While this might not be as applicable in the current financial climate as rates will likely not be agreeable. In the future consider switching to a fixed-rate mortgage if you are currently on a variable rate. Fixed-rate mortgages offer stability as your interest rate remains unchanged for a set period, typically two to five years or longer.
Overpaying on your mortgage: By making additional overpayments on your mortgage when possible, you can reduce your outstanding balance, which may help mitigate the impact of future interest rate increases.
Create a financial safety net: Sometimes it can be hard to predict exactly where the market will go. Making sure that you are keeping a rainy day fund and regularly contributing to your savings can ensure that you have some protection when unexpected expenses appear. Where possible, it helps to be prepared for financial downturns and ensure that your funds can handle changes when they appear.
Are you struggling with debt?
There are always solutions, no matter what your situation.
At MoneyPlus we understand that every financial situation is different, and approach every customer with the care and individuality that they deserve.
So, get in touch today and start living better with MoneyPlus Advice.