Interest rates are going up. The housing market is cooling down. Familiar sounding headlines? You bet they are. We do love going on and on about house prices don’t we?
It’s not quite so much fun if the value of your house stops going up or even falls. You stop feeling that bit richer than you did. And then there’s the not so small matter of the mortgage.
The Bank of England is well and truly into a cycle of rising interest rates and hasn’t stopped yet. The cost of borrowing money has gone up since late 2003 and, frankly, it is going to be at least late 2005, early 2006 before it stops going up any further.
It was Sir Edward Coke (1552-1634), Attorney General to Elizabeth I and Lord Chief Justice to James I who first told us that, “An Englishman’s home is his castle.” The key question now is how can you continue to afford the upkeep of your ‘castle’ as interest charges go up?
Let’s knock one bright idea on the head straight away. Already there is concern that rising interest rates will stretch borrowers with interest-only mortgages, in which homeowners make interest payments alone rather than repaying capital each month. Interest-only borrowers with no other way to pay off their loans face having to sell their homes at the end of the mortgage to repay the debt. Do you really want to be left without a roof over your family’s head?
A recent Survey of English Housing by the Council of Mortgage Lenders suggested that around 250,000 households have interest-only loans not linked to investment policies designed to repay them and that, of that total, some 6%, (around 14,000 households) don’t have a clue about how they’re going to pay the mortgage off!
So, an interest-only mortgage without a plan to pay it off is not a way to |
|
EVER HEAR THE STORY ABOUT THE FROG SITTING
IN THE PAN OF COLD WATER THAT GRADUALLY GOT
WARMER AND WARMER UNTIL IT BOILED?
 |
save money. It is a way to lose your home! Now you may feel you can cope with interest rate rises as they come. After all, assuming the Bank of England sticks to quarter-point (0.25 per cent) rate rises and your mortgage lender follows suit, that’s currently less than an extra £17 a month on your repayment mortgage and less than £22 a month more on an interest-only deal. You can cope with that, can’t you?
Hmmm, ever hear the story about the frog sitting in the pan of cold water that gradually got warmer and warmer until it boiled? When the base rate was at its lowest in summer 2003, chances are you could have comfortably arranged a mortgage of £105,000 (the current average) at a variable rate of around 5.5 per cent. On a repayment basis that would havecost you £636.48 a month and interest-only £459.38 a month.
It will be costing you more than that now
and by the time the interest rate cycle turns again, you could easily be looking at a variable mortgage rate of, say, 8 per cent. What would that do for your costs? A £105,000 repayment mortgage at that rate would be costing you £819.69 a month and interest-only £700 a month. That is £183.21 and £240.63 a month more respectively than it cost when the rate was 5.5 per cent. |
You won’t be paying your mortgage off more quickly because you are paying more. You are merely going to be keeping up with the higher cost of money. And what might it do to your monthly budget? Can you afford to pay between a third and half more than you were paying last summer? Now is the time to plan ahead.
We know the money we have borrowed in the past is going to get more expensive in the future. But you don’t have to pay that price. If you have a mortgage that is currently on a variable rate it is time to take a look at the fixed rate and discounted rate deals that are available. You could find yourself pleasantly surprised. I am not advocating that you remortgage to borrow more money. What you should consider is re-mortgaging to make more of the money you have already borrowed.
Find the right fixed rate deal and you will know that the amount you pay each month will not be affected by increases in the base rate. You may also find that it is actually costing you less than you have been paying already!
You will certainly be able to reduce your immediate monthly outgoings by re-mortgaging with a discounted rate. As the name suggests, the rate you pay will be lower than your lender’s standard variable rate by a fixed margin, usually around 1.5 per cent lower.
However, the cost of your mortgage will still rise as that variable rate rises. The advantage of a discounted rate deal over a fixed rate deal is that when interest rates do fall, so will your monthly payments. It costs you nothing to shop around the mortgage market to see what’s available and you could find plenty of savings that you didn’t know you could make. |
