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.