How to prepare for rising mortgage rates - including overpaying and looking in advance
With interest rates due to increase this month, Which? shares how you can prepare for higher mortgage rates.
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With interest rates expected to rise again this month - for the eleventh consecutive time in just over a year - millions of mortgage customers are sure to feel the blow as borrowing becomes more expensive. But according to Which?, there are ways customers can prepare for, and even combat, rising mortgage rates.
Reena Sewraz, the Which? Money Expert, said: “Millions of mortgage borrowers will be worried about the upcoming interest rate decision and the impact this will have on their finances, particularly as many are already feeling the pinch of higher prices on food and energy.
“There are steps you can take to protect yourself from rising rates. Well before your mortgage deal expires, hunt for a new rate, as most lenders will let you secure it for up to six months in advance.
“If you can, overpay your mortgage to build up your equity to unlock cheaper deals when you come to remortgage, and make sure your credit report is in good shape to secure the best deals on the market.”
6 ways to prepare for rising mortgages
Assess the impact on your own finances
Those who are on a tracker mortgage will see the impact on their monthly repayments immediately if the interest rate rises. If you are close to the end of a fixed-term deal, you will most likely be met with double or triple your current costs when they come to remortgage, says Which?, as they are likely to be higher than when you first took out your mortgage.
“Think about how much you can afford to pay each month and whether there’s likely to be any change to your income in the short-term,” said Which?. “If you’re struggling or think you’ll struggle to pay your mortgage, seek advice as soon as possible. Speak to your lender and tell them about your issues – there are support options out there.”
Work out which mortgage suits you best
If you are in the process of buying a property, or if you’re due to remortgage, you will need to consider what type of mortgage is best for your circumstances. A majority of UK homeowners choose fixed-term mortgage deals, as repayments will remain despite interest rate hikes for the duration of the term - with the most popular ones lasting two, five or 10 years.
Tracker mortgages come with more risk, as the base rate could potentially continue to rise throughout the term, but could also mean lower costs should interest rates fall. Tracker deals do however often come with a so-called “collar”, which specifies the minimum amount you have to pay, regardless of interest rates.
Find a new deal before your current mortgage expires
“Be proactive in hunting for a new deal, particularly if you’re one of the 1.4 million homeowners whose fixed-term mortgage is coming to an end this year,” says Which? experts.
When a fixed or tracker mortgage comes to an end, you will usually be moved onto your lender’s standard variable rate (SVR) automatically, where the interest rates will likely be higher. SVR rates can also increase at any time, regardless of what is happening to the interest base rate.
“Before this happens, there is a window to lock in a new deal before your existing one ends,” says Which?. “Depending on the lender, you can secure a new deal up to six months in advance. You could make savings on repayments by getting a new mortgage locked in before an interest rate hike – and avoiding an SVR.”
If you look for a new mortgage deal way in advance, make sure you check the lenders terms and conditions. Should you find a better deal closer to the start of your new mortgage, some providers will allow you to switch to a cheaper offer until you officially remortgage.
Act quick to score the best mortgage deals
If you’re in the process of buying a new property - or is up for a renewal very soon - you might not be able to wait too long if you’re looking to secure a competitive mortgage deal.
The cheapest deals are currently below 4 per cent, but most of them get taken off the market fast. Platform and the Co-operative Bank’s 3.75 per cent deals for 60 per cent loan-to-value (LTV) were recently taken off the market, while Nationwide also recently withdrew its under 4 per cent offers.
If you find a deal that suits you, and you know you will be able to replay, it’s a good idea to act quickly not to risk losing out on the deal.
Consider overpaying your mortgage - if you can
While this strategy highly depends on your current situation, and might not be possible for everyone, customers on a repayment mortgage can battle rising interest rates by paying more than required, which will drive down the cost of the loan. This can end up saving you thousands of pounds in the longer run.
Which? said: “Overpaying increases your equity in the property – that is, the proportion of your home that belongs to you. The bigger your equity the lower your loan-to-value when it comes to remortgaging, which can give you access to more competitive rates. For example, rates tend to be cheaper at 85% LTV compared to 90% LTV.”
Many mortgage lenders allow customers to overpay up to 10 per cent per year, but sums larger than that may lead to a penalty. NatWest have however doubled their annual overpayment, allowing customers to pay up to 20 per cent extra per year.
Work to increase your credit score
Your credit score rating can influence which mortgage offers are available to you. If you have a poor credit score, you might not get any offers from some lenders, especially those with the best rates on the market.
Increasing your credit score before applying may help you land a better deal. You can work on your credit score in several ways, including updating your address, correcting any mistakes in your credit report, and getting on the electoral roll at your current address.