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Interest rates can have an impact on a wide range of areas including mortgages, borrowing, pensions and savings. The Bank of England sets the bank rate (or ‘base rate’) for the UK, which is currently 2.25%.
What determines the interest rates?
Parliament tasks The Bank of England with keeping the rate of inflation at 2%. Putting up interest rates is the main thing it can do to stop prices from rising so fast and bring down the rate of inflation. The Bank of England rate often influences the rates charged by lenders and paid to savers.
Banks are not obliged to follow Bank of England interest rate decisions, but they can influence the cost of borrowing, or how much interest you can earn on savings.
What impact does the interest rates rise have on mortgages?
If you have a loan or mortgage that charges you a variable interest rate, you might find that the cost of your repayments goes up.
If you’re on a fixed rate you won’t see any change until the end of your fixed period.
It’s important to understand how a change in interest rates could impact your ability to pay. You can use a mortgage calculator to work out how your monthly payments might be affected.
When, and if, your mortgage repayments are affected by an interest rate change will depend on what type of mortgage you have and when your current deal ends.
If you have a variable rate tracker mortgage, linked to the BoE base rate, you’re likely to see an immediate impact on your mortgage repayments if there’s an interest rate rise.
Those on a standard variable rate mortgage will probably see an increase in their rate in line with any interest rate rise. The change is decided by your lender, so this isn’t guaranteed but is highly likely. If you’re unsure, check the terms and conditions in your original mortgage offer document.
People with fixed-rate mortgages are likely to be affected once they reach the end of their current deal. An interest rate rise could make re-mortgaging or a product transfer to a new fixed rate more expensive.
Seven tips for managing an interest rate rise on your mortgage
Find out what mortgage you’re on
How you’ll be affected by an interest rate rise depends on what mortgage you’re on and when your deal comes to an end. If you don’t know, check your paperwork or check with your mortgage provider to find out.
Work out how an interest rate rise will affect you
Now you know what mortgage you’re on, you’re in a better position to find out how this will affect your finances and when you’re likely to see this change. Use a mortgage calculator to work out the impact.
Work out what you can afford
If your mortgage repayments are likely to go up, work out if you can afford the increase. Create a budget and see if there are any areas where you might be able to cut back. If the increase is likely to be in the future, then start building up a savings buffer so you’ll be able to afford your mortgage when they happen.
If you’re worried about how to afford this
You don’t have to be in debt to seek help. We can help you work out your budget and assess your income and expenditure early before you get into financial difficulty. You can also speak to your lender about available options they can help and support you with, such as extending the term or reducing payments.
Build up your credit score
It might seem a strange time to be focusing on your credit score, but by working to improve your credit score, you’ll be able to get a better deal when your deal comes to an end or it’s time to re-mortgage.
Make sure you’re on the best deal
If your current deal is coming to an end, look at switching to make sure you’re on the best rate. A lot of lenders will let existing customers secure a new rate up to six months before their existing one ends. It can also be worth looking around with different lenders if you’ve got some time left on your current deal. In some cases, you’ll have to pay an early exit fee, so it’s important to understand your budget. It’s also important to understand that there’s no way of 100% knowing what the rates will be in the future.
Overpay your mortgage
If you still have multiple years left, it might be a little while before an interest rate rise hits you in the pocket, so take advantage of the low rate you’re currently on and pay extra. There are limits on how much you can overpay and there might be charges attached. This is something you should check with your mortgage provider.
If you’re struggling with your finances and need some extra support, we’re here to help. Get in touch with us today by clicking here.