The Great British public have been enjoying some extremely low interest rates and that looks set to continue, as Mark Carney and the Bank of England today suggested they will “stay lower for longer”
With a rise not looking likely until well into 2016, UK homeowners can continue to take advantage of some of the cheapest mortgage rates on the market.
Although there is no rise on the immediate horizon, for those securing a mortgage today it is likely by the time their fixed term has ended (usually two years), interest rates will be on the up again. However leading online estate agent, eMoov.co.uk, has found that a substantial number of UK homeowners, are un-aware as to the impact an interest rate increase could have on their monthly mortgage payment.
eMoov surveyed over 1,000 UK homeowners and asked them “do you know how much your monthly mortgage payment would increase by, if the interest rate rose by 0.5%?”. Four out of ten (39%) of UK homeowners said they were in the dark and unaware as to the consequences.
0.5% may seem like an insignificant amount, but it could leave many homeowners scrambling to make ends meet. So whilst we enjoy a bit more money in our back pocket at present, it’s worth keeping an eye on the future in anticipation of things to come.
What will a 0.5% rise in interest rates mean for the average UK homeowner?
With an average loan to value ratio of 85% those looking to buy at the average UK house price of £209,383 will be borrowing £177,976. On an interest rate of 1.85% this equates to £741 a month, on a 2 year fixed, 25 year mortgage. But should interest rates climb by just 0.5% once the two years is up, the monthly payment of this mortgage will jump by 5.9%.
In London where the average house price now tops £500,000, this increase of 5.9% could equate to more than £1,000 each year.
For those really borrowed up to their eye-balls, the consequences of a 0.5% increase in interest rates will be even higher. On a loan of £475,000 for a property in the capital, a monthly re-payment will be £2,544 at a rate of 4.14%. But should this increase marginally to 4.64%, the cost of a monthly mortgage payment would again rise by over 5% to £2,678 a month.
That’s a potential setback of £1,340 a year for London homeowners, once the two year fixed term of their mortgage expires.
No concern perhaps for those in London’s more prestigious boroughs, but potentially disastrous for homeowners at the other end of the ladder, struggling to afford the cost of living in the capital as it already stands.
Nationally a 95% mortgage on the average house price of £209,383 will see a monthly payment of £1,048 jump to £1,103. Again, not a huge jump, but for those having to opt for a 95% mortgage, it is likely an increase of £500+ a year will throw a spanner in the works financially.
Russell Quirk, Founder and CEO of eMoov.co.uk, commented: “A jump of £50 to £100 per a month might seem insignificant to most, but for those really borrowed up to the hilt in order to get a foot on the ladder, it could be potentially catastrophic. Despite the comfortable economic climate at present, many UK homeowners are counting every penny in order to get by. So an increase of more than a £1,000 a year could soon snowball into a more substantial debt.
The reality is that interest rates will rise eventually despite Mark Carney’s comforting words this week and when they do, it’s likely to be by more than 0.5% over a short period. So regardless of what loan to value ratio you currently have, your monthly payments will increase by at least 5%.
The key to keeping on top of your mortgage is understanding what you need to pay and when, way in advance of it actually happening. This will give you plenty of time to get your finances in order and keep your head above water.”
What can you do to avoid a mortgage payment disaster?
If you’re worried about a potential increase in interest rates and what it means to you, make sure you’re on top of the following:-
• Know who is dealing with your mortgage personally and don’t be afraid to phone them and ask for advice or clarity on your situation.
• Keep an eye on the news for any announcements, particularly the autumn budget, as this will give you a head start in preparing for a jump in interest rates, as well as an idea of what they will increase by.
• Understand your mortgage so you know the potential impact an increase could have on you.
• Things to find out are: Are you on a fixed term? When does it expire? What is the current interest rate you are paying on your mortgage? What does this equate to as a monthly payment? What would this change to if interest rates increase by 0.5%, 1% or 2%?
• As boring as it sounds, plan for the future. If you are in a particularly precarious financial situation, start to put something a side now so you aren’t stung unexpectedly.
Advice for people currently looking for a mortgage:-
• Do your homework, there is a whole host of products on the market and what might be best for one person, won’t for another.
• If using a mortgage broker make sure you use a whole of market broker. Lots of brokers and their affiliates will promise the best rates, but only draw from a select number of products to ensure you choose one that suits them rather than you.
• Make sure if you are using a broker that they are a fee free broker to avoid getting hit by unforeseen charges.
• Saving that large deposit before securing a mortgage really will put you in a much safer, more advantageous position. Not only will you be more financially stable, in the long run it will cost you less and the interest rates paid will be lower.
Do you know how much your monthly mortgage payment would increase if the interest rate rose by 0.5%?
Answer UK London
Yes 38% 52%
No 39% 41%