Your mortgage costs could soar £1,500

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The only way for interest rates is up – when they do rise, will you be able to afford your monthly mortgage repayments?

Experts widely predict the Base Rate will rise in 2011 but exactly when and by how much is still under debate.

Today inflation stands at 4.0% under the Consumer Price Index much higher than the Bank of England’s target of 2%.

According to a Reuters poll of 62 economists, most believe the Bank of England is expected to wait until at least October to raise rates, with only seven anticipating a rate increase before June.

Rate rise

If you’re on a tracker or a variable rate mortgage you should consider what a potential rise could mean to your monthly payments.

Those of you who rely on the interest you earn from your savings will be happy about a rate increase, however, homeowners with already tight budgets will fear an increase to their monthly payments.

Research from financial markets insurance specialist MarketGuard reveals that 2.7 million Brits on variable rate mortgages would struggle to pay an extra £100 on their monthly repayments. This number jumps to 4.8 million if payments increased by £200 - equivalent to a 2% interest rate rise.

Simply put, you should prepare for an interest rate rise on your mortgage and consider what you will be able to afford if you are on your lender’s SVR.

How will a Base Rate increase affect you?

According to money education charity Credit Action, the average amount still owed on a mortgage in the UK is £109,000.

Let's take an outstanding mortgage balance of £109,000 with a 20 year repayment period remaining. If you are on your lender’s SVR you could be paying around 4% or even higher. An increase of 1% could add £60 to your monthly payments and if the Base Rate jumps by 2% which it could very well do in the next year or so, you could be looking at £1,488 increase per year. Is that something you will be able to afford?

Below you will see the effect of various rates hikes and what it will do to your monthly repayments.

Current Standard Variable rate taken from Halifax, details correct as of 14/01/11 **

Is a fix a good idea?

Instead of looking ahead, many of you may be looking at what suits you at the present without taking into account the potential impact of an increase.

With a fixed rate you can ensure your payments will stay the same - however, you will be paying slightly more for this guarantee.

What you should consider is that when a Base Rate increase becomes more probable there is a good chance that fixed rates will start to rise. If you delay finding a deal now you may find a significant increase in your repayments when you finally decide to get a new mortgage.

The average SVR is around 4.5% which is a whole 4% above the base rate with only larger mortgage providers able to offer cheaper deals to customers with a smaller LTV.

Many of you have been sticking to your SVR because it could offer you maximum flexibility and give you an opportunity to hedge your bets. However, lenders have begun to raise rates but there are still some good deals out there. If you are on an SVR of 3.5% or above, there may be other options.

Being prepared can ensure you are not left in a financial bind. House prices have fallen some unfortunate borrowers have sunk into negative equity, making it difficult to find a lender who will offer them a new deal.

Clearly it makes sense to look into securing your payments when rates are at their cheapest as it gives you the security of fixed monthly mortgage payments at competitive rates.

** Figures based on an outstanding mortgage balance of £109,000, with a repayment period of 20 years remaining. Monthly costs are based on a repayment mortgage.

Assumes the standard variable rate will increase in line with rise in interest rates

Details correct as of 14/01/2011



**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**

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