What You Can Do In Order To Prepare If The Banks Raise The Interest Rates And Mortgages Become More Expensive?
Banks are extremely dynamic when it comes to adapting to changes in the financial market. As a result, the base interest rates that they charge can change fairly quickly. When this happens, the cost of borrowing money can change, which will affect everything from loans to mortgages and even payday advances.
What happens when the interest rates of banks rise?
The interest rates of banks in the United Kingdom are controlled by the Monitory Policy Committee, which is part of the Bank of England. This is the rate at which all banks borrow money from the BoE. If the Monitory Policy Committee decides to increase the base rate, the interest rates offered by banks throughout the country will also raise.
This having been said, it is important to mention the fact that banks are not required by law to change their interest rates when the base one changes, however, most choose to do so in order to increase their profits. When the base rate is increased, the price of loans (payday advances, mortgages, installment payments), and the amount of money that you earn from interest will also change. You can learn more here.
How much do interest rates affect mortgages?
Depending on your agreement with the bank, if your mortgage is affected by the interest rate, you may see significant changes in the value of your repayments. The increase in value usually depends on the lender, and there may be cases in which the base rate changes, but your monthly repayments remain unchanged.
If you are on a standard variable rate mortgage, there is a big chance that if the base rate increases, you will also see an increase in the value of the monthly payments, almost immediately. Alternatively, individuals who have a fixed mortgage rate may only see the effects of this change at the end of their deal, in the form of a more expensive re-mortgaging agreement.
Generally speaking, the best way to check how your mortgages will be affected by a change in base interest is to read the original mortgage offer document. All relevant details will be in the “Terms and Conditions” section.
Easy ways to manage an increase in the interest rate for your mortgage
Having to make monthly repayments for a mortgage is stressful even without an interest rate increase, however, when the base rate changes, you need to know what to do. Here are some useful tips to get you started:
- Determine what type of mortgage you are on
Look for the documents of the agreement that was made between you and the bank, and determine if you are on a standard variable rate mortgage or if you have a fixed-rate one. This is important in order to determine if your monthly repayments will change in the future and by how much.
- Make all the necessary calculations
Once you determine how your mortgage is affected by a change in interest rate, it is time to calculate how a raise may impact your finances. If you do not know how to calculate potential changes in your monthly repayments, depending on the interest rate, you should be able to find specialized web-based calculation software, online, that is free to use.
- Start creating a budget for emergencies
If you foresee an increase in the base rate, you should try to cut your expenditures by as much as possible and start creating a financial buffer. You will be able to use this money in case the value of your monthly repayments increases in value.
- Try to build up your credit score by as much as possible
When your current deal with the bank is over, a good credit score will go a long way towards securing a better remortgaging agreement.
- Start overpaying your mortgage
Check your mortgage agreement and determine how much you can overpay each month. If you expect that the interest rate will increase by a lot, it may be in your best interest to try to repay your mortgage early.
Generally speaking, it is better to do this when the rate is low because there are fewer financial constraints that you have to worry about.
Mortgages are vital financial instruments, however, it is important to understand how they work in order to keep your expenses under control. All the methods that we have presented above should help you prepare for an increase in price for your mortgage, and also ensure that you will be able to make the monthly repayments regardless of how much the interest rate grows.
You will be able to find online and offline tools that are designed to help you with all the calculations regarding how interest affects mortgages. Furthermore, if you decide to start creating a budget, consider using a mobile app in order to help you keep track of your daily, weekly, and monthly expenses.
Banks are not always the solution when it comes to borrowing money. Whether you’ve got a bad credit score or simply do not have a bank office nearby, getting loans online can be just as easy as borrowing money from a physical location.
This having been said, there are two main types of platforms that you can use in order to get loans, and each of them works differently. Choosing the right one can make a big difference in terms of what taxes and fees you have to pay, but also when it comes to what happens if you miss a monthly payment or need an extension on your loan.
What is peer-to-peer lending?
Peer-to-peer lending platforms are essentially websites that put borrowers in contact with lenders. They act as enforcers, protecting the interests of all users and ensuring that the transactions go smoothly and that everyone follows the terms that they agreed to.
Unlike how a bank offers a loan, these platforms have a minimal set of rules and regulations that affect how money is borrowed. Users who need loans simply submit their request and wait to be paired with a lender. Once this happens, both discuss the terms and conditions of the transaction and the money transfer is handled by the platform.
When it comes to credit score checks, peer-to-peer lending platforms do not usually perform them, nor do they report the loans to any of the national credit registers. Keep in mind that lenders may request that a credit score check be performed if they are unsure if they should offer a loan, but this does not mean that the money that you borrow will affect your permanent financial records in any way.
What is online commercial lending?
Online commercial lending websites are very similar to banks in terms of how they give out loans. The platforms pool the money that is offered by a large number of private creditors and offer loans or lines of credit to anyone who meets their requirements. Being organized as a singular platform, all transactions follow the same algorithms and rules.
Users who wish to get loans must create a user account, as with any other website and submit various personal and financial documents. In some cases they may also require you to submit your credit score, however, this information is usually only used for marketing purposes.
Commercial lending platforms can approve a loan request in under 24 hours, and transfer the money to the bank account of your choice in only a couple of minutes. These platforms are also the only ones that you can borrow large amounts of money from without having a guarantor. The downside is that they often have higher penalties if you miss a monthly payment or use a large amount of money out of your line of credit.
Peer-to-peer vs. online commercial lending – Which one is better?
Choosing between the two is more a matter of personal preference, but is should also depend on how much money you need to borrow. Here are the main things that you should keep in mind when it comes to these two types of platforms:
Peer-to-peer lending platforms
- They offer more flexibility – You can get in contact directly with the individual that is giving you the loan, which means that you have much more freedom when it comes to coming to an understanding. Furthermore, interest rates are usually lower than on other platforms;
- Less stressful – Missing a monthly payment does not have serious repercussions, for the most part. The majority of lenders can be reasoned with, giving you a few more days to return their money;
- No credit checks – These platforms do not typically ask for your credit score nor do they perform any checks. This makes them ideal if you have a poor credit score that would prevent you from getting a loan from your local bank;
- Only good for small loans – Peer-to-Peer platforms are generally used for borrowing small amounts of money (under 1000 pounds). Most lenders may not agree to give you larger sums unless you have a longer financial history with them;
- Difficult to find long-term lenders – The standard period for borrowing money using these platforms is one month. It can be difficult to find lenders who will agree to give you money for longer periods;
Commercial lending websites
- Great for large loans – Online lending websites can allow you to borrow up to 5000 pounds for periods that are greater than 24 months;
- They offer lines of credit – These are the only online platforms that offer lines of similarly to how banks do;
- Fast approval and transactions – The approval process for a loan request takes under 24 hours and the money is transferred in a matter of minutes;
- Strict agreements – The agreements for most loans are strict and cannot be negotiated. While this is not necessarily a bad thing, it does make the platforms less flexible than others.
Overall, both platforms are as safe to use as regular banks. They are heavily regulated by the UK government and choosing one or the other is more a matter of how much money you need to borrow. Peer-to-peer lending platforms are more useful if you need small, short-term loans, while online commercial lending websites are more suited for borrowing larger amounts of money or requesting lines of credit.