How to limit mortgage repayments in a rising interest rate environment
The housing sector in the United States has become a popular place despite the general economic downturn caused by the Covid-19 pandemic. – ©AFP
Around the world, the economic situation is precarious and inflation is rising. In an attempt to curb rising prices, many central banks raised interest rates. One of the biggest impacts of this is on borrowers, especially when rising interest rates affect mortgage borrowers.
For this reason, many citizens want expert advice on how to lower their repayments.
To give advice to Digital diary readers, we reached out to Claire Flynn, mortgage expert at money.co.uk.
Flynn begins by putting the current situation into context and the challenges facing many citizens: “Mortgage borrowers may suffer from rising interest rates. For those with a fixed rate mortgage, interest rate changes will not apply until the end of your fixed term.
For others, the impact could be greater: “However, for those with a variable rate mortgage, such as a follow-up or a discounted offer, the impact is likely to be much faster, this which will lead to an increase in mortgage repayments.”
“Tracker mortgages are aligned with the Bank of England’s movements, while discount mortgages are determined by your lender and based on their standard variable rate (SVR). The SVR is not explicitly linked to the rate of basis of the Bank of England, but it is likely to be influenced by it.
In terms of impact, Flynn explains: “”When a fixed mortgage agreement ends, you are normally returned to the lender’s SVR. However, SVR rates are generally higher than previous fixed rates and therefore your monthly mortgage payments will increase.
So how can I lower my mortgage payments?
Flynn has some advice for people: “Those whose fixed rate mortgage is coming due soon may want to consider changing their agreement sooner to take advantage of interest rates before they go up. However, remortgaging before the end of your current contract could mean that you will have to pay an early repayment charge (ERC). You should compare the cost of ERC to the amount you think you can save by remortgaging, to make sure the early switch is worth it.
There are also other factors to consider: “Although most mortgage agreements in the UK are valid for six months, so if your current agreement is due to expire in the next few months, you can apply for an advance mortgage. This allows you to secure a rate and switch when your deal comes to an end, avoiding an ERC.
However, it is important to read carefully and make the right decision. Here, Flynn advises, “Critical eligibility factors when remortgaging are your credit rating, your income and affordability, your loan to value (LTV), and your overall financial situation. If you qualified for a mortgage before, you should be able to find a mortgage deal now. However, if your financial situation has changed significantly, you may find that the deals you are offered are worse or you may find it difficult to remortgage at all.
In summary, Flynn’s final recommendations are: “There are a number of steps you can take to get the best possible mortgage deal for you. For example, maintain a good credit rating and try to lower your loan-to-value (LTV) ratio. It’s also worth considering talking to a mortgage broker, who can look at the entire available market to find the deal that’s right for you.”