Tips to combat rising mortgage rates
As the cost of borrowing increases, there are steps buyers and homeowners can take to help keep mortgage payments manageable. There was an article filled with ideas to do just that published by Zoopla. This is what they had to say:
Higher mortgage rates are not good news for homeowners and homebuyers, but there are steps you can take to help offset the increase.
1. Book in a fixed rate deal in advance
With interest rates rising, you can protect yourself from future increases by taking out a fixed rate mortgage. You can book in a mortgage six months in advance to lock in a good rate and it’s a good idea to speak with a broker to secure the best rates out there.
Unlike variable rate mortgages, which move up and down in line with changes to the cost of borrowing, the interest you are charged on a fixed rate mortgage stays the same for the length of the product term. This is usually two-years or five years, but can be as long as 10-years.
But before opting for a fixed rate deal, it is important to be sure you will not need to end the mortgage early. Early redemption penalties on 10-year fixed rate loans can be as high as 8% of the outstanding mortgage debt.
2. Opt for a longer mortgage term
Another way to keep your monthly mortgage repayments down following recent interest rate hikes is to opt for a longer mortgage term.
While increasing the total number of years over which you repay your mortgage will increase the amount of interest you are charged over the lifetime of the loan, it does help to keep monthly payments lower.
For example, repayments on a £200,000 mortgage with a rate of 5.5% would be £1,228 a month if you had a standard 25-year mortgage term. But if you increase your mortgage term to 30 years, your monthly repayments would drop to £1,135. If you increased it to 35 years, your monthly repayments would drop to £1,074.
Or to put it another way, increasing your mortgage term by five years would offset a 1% increase in interest rates.
Some lenders will let you have a mortgage term of up to 40 years, depending on how old you are when you first take out the loan.
3. Overpay your mortgage
While overpaying your mortgage won’t lead to lower repayments in the short term, it will offset the higher cost of interest over the longer term.
This is because by paying extra each month, you reduce the amount of outstanding debt you owe, which means you will be charged less interest over the lifetime of your mortgage.
For example, if you made overpayments of £50 a month on a £200,000 mortgage with a 25-year term and interest of 5.5%, you would save a total of £15,450 over the total mortgage term.
With each 0.25% rise in interest rates costing someone with a £200,000 mortgage around £25 a month extra, making overpayments can more than offset the cost of higher rates over the long term.
4. Cut back in other areas
It’s easier said than done in the face of higher energy bills and other increases to the cost of living, but if you’re looking to secure a new mortgage, it can be an important to step towards ensuring you qualify.
When reviewing your mortgage application, lenders will not only look at how much they think you can afford to borrow relative to your income, but also whether the loan is affordable in the context of your other outgoings.
If you can demonstrate to lenders that you have made cutbacks in other areas, they are likely to feel more confident that you have room in your budget to manage higher monthly mortgage repayments.
5. Pay less for your property
If higher mortgage rates are starting to make your budget look tight when searching for a new home, you may need to opt for a less expensive property.
To offset every 0.25% increase in mortgage rates, you would need to borrow around £5,000 less to avoid seeing a rise in your monthly mortgage repayments, based on a £200,000 mortgage.
For example, if you had been planning to buy a home for £250,000 with a £50,000 deposit, your monthly repayments would have been £1,111 on a mortgage rate of 4.5% and a 25 year repayment period.
If interest rates increase to 6%, you could keep your repayments at this level by looking for a home that is £28,000 cheaper.
With the housing market in some areas already starting to slow in the face of higher interest rates and the rising cost of living, you could also be in a good position to negotiate with sellers.
6. Save a bigger deposit
If you don’t think you could find a cheaper home that meets your criteria or are nervous that you won’t be able to negotiate the asking price low enough, you could consider saving a larger deposit to offset interest rate rises.
As in the example above, you would need to save an additional £5,000 to offset the impact of every 0.25% increase in interest rates on your monthly mortgage repayments.
So, if you were planning to purchase a £250,000 home with a £50,000 deposit but interest rates had risen by 0.25% since you first started looking, you would need an additional £5,000 deposit to keep your mortgage repayments the same.
7. Consider renting out a room to a lodger
Another option to ensure you can still pass lenders’ affordability tests in the face of rising interest rates is to consider making an income from your home.
The interest rate rises seen since last September have added around £330 to monthly repayments for a £200,000 mortgage.
Could you consider renting a room out to a lodger to help make up the shortfall?
Modified article taken in part from an article from: Zoopla by guest author Nicky Burridge
If you liked this article, you may enjoy this one: Impact of interest rates
All property sales and the financial advice that surrounds them are as unique as the people engaging in the transaction. It is important to not decide without seeking professional advice. If you want to sell your home and are considering redecorating before marketing, speak to one of our Property Professionals to get the best advice for presenting your home for sale before making any investment. This article is for the purpose of information only and should not be seen as financial advice.