If your bank increases their mortgage rates it could potentially add hundreds of pounds to the cost of your repayments. Here’s how to fight back if your rate is set to rise.
Despite national interest rates remaining at an all time low - the Bank of England base rate has been held at 0.5% since March, 2009 - some the UK’s biggest mortgage lenders have started to increase mortgage rates.
Everything from uncertainty in the Eurozone, to the increased cost of at borrowing for banks themselves has been blamed for the rate hikes.
But regardless of why banks have started to increase mortgage rates, if your lender decides to hike yours it’s likely to have a big impact on your finances.
Here’s what you can do if your lender decides to increase its mortgage rates.
Each mortgage lender sets a “standard variable rate” (SVR) that it uses as a benchmark to set the rate of interest applied to its portfolio mortgage.
If a lender decides to increase its standard variable rate all its mortgage customers that aren’t on a fixed rate mortgage deal will see their monthly repayments go up.
Equally if a bank drops its SVR interest rate, customers who are not tied into a fixed rate deal would see their repayments fall.
Given the large amounts borrowed through a mortgage, even a small increase to a bank’s SVR (e.g. 0.5%) could add hundreds of pounds a month to their average customer’s mortgage repayments.
When a bank increases its SVR, not all of its mortgage customers will be immediately affected.
This is because not all mortgages are directly linked to the bank's standard variable rate. For example if you have a fixed rate mortgage your interest rate will stay the same until the end of your deal.
However if you have a tracker, discounted, capped, variable or basic standard variable rate mortgage, you could see your payments go up.
Firstly, if you are on a fixed rate mortgage and your lender decides to increase its standard variable mortgage rate then you will be protected until the end of your fixed rate term.
This means your monthly repayments won’t change in the short term, although you’ll need to be prepared to shop around for the best remortgage when your current deal ends.
If you are on a tracker, discounted or capped rate mortgage, or have been transferred onto your lender’s standard variable mortgage rate then your repayments will go up.
If this is the case, the first thing you need to do is check exactly how much extra you will have to pay each month, and when the hike will take effect.
Once you have this information you’ll be in a better position to look at your options and decide on the best course of action.
If you’ve been making regular overpayments your existing monthly payments may not actually go up, it would just mean that what you were previously paying on top of your mortgage will cover the basic cost instead.
The first step is to look at your finances and check if you can cope with the increased cost and look for areas to cut back to accommodate the increase payments.
Left unchecked your insurance premiums can soon start to climb, especially if you just accept the renewal quote from your existing insurance provider each year.
Utility bills are increasingly taking up more and more of an average persons' monthly income, so making sure you are on the cheapest gas & electricity tariff, mobile phone contract and broadband package could help cushion the blow of a mortgage hike.
It’s important to remember that paying your mortgage each month should be top of your list of financial priorities, as defaulting or being late with your repayments could put your home at risk.
Now is the perfect opportunity to ensure your borrowing is as cheap as possible, whether this means moving your credit card debts to a 0% balance transfer card, or repaying a loan using a 0% money transfer.
Outstanding borrowing on credit cards and unsecured loans don’t have the same link to your property meaning you could decrease your payments on your credit cards (although you should always make at least the minimum payments) if you are struggling to meet your existing payments on your mortgage and have cut your expenditure elsewhere as much as possible.
As well as addressing your ongoing financial costs, writing a budget to ensure your finances can cope with increasing mortgage repayments is a good way to make sure you are able to handle the extra cost.
Writing a budget that includes all your income and expenses each month will also help you identify areas you might be able to cut costs so you have more money spare to put towards your mortgage.
Try following our Action Plan; How to write a budget for step-by-step help on building and sticking to a budget.
If your mortgage has become more expensive you may be able to switch to a fixed rate deal or to another provider to keep your costs down.
A good first step will be to contact your existing mortgage lender to see if you can remortgage and switch to a lower rate mortgage, you can compare a list of remortgage deals exclusively for existing borrowers using our existing customer remortgage table.
Before doing so you will need to check whether you are tied in to your mortgage deal for a set period and if you can switch away without incurring any additional charges.
If you are on your lender’s standard variable rate, then there is a good chance you’ll be able to move without incurring a penalty, although it is always worth double checking before you start looking elsewhere.
Even if you’re on a tracker or discounted mortgage deal it’s worth speaking to your lender about your options as they may let you move onto a cheaper fixed rate deal and this would save you many of the costs associated with switching lender.
Once you know how much moving might cost, and have the details of the best deal your current lender can offer you should begin looking for a better deal elsewhere.
You can compare all the top mortgage deals currently on offer in the UK using our mortgage comparison table.
Alternatively if you would prefer to speak with a qualified FCA mortgage broker you can enter your details on our mortgage enquiry form and a broker in your area will be in touch to review your options.
If you’re in negative equity (you owe more on your mortgage than your home is currently worth) when your mortgage rate is put up by your bank it will be more difficult to move your mortgage elsewhere.
However, that doesn’t mean that you should simply accept the extra cost without looking into your options.
Firstly, there is a small selection of remortgage offers particularly available to homeowners who are seemingly trapped by negative equity.
These specialist mortgage deals could offer an alternative to paying the increased mortgage rate on your existing mortgage so are worth investigating further.
For more information on your options if you need to switch your mortgage, read our guide: Negative Equity But Need to Sell: Your Options.
If you were struggling to meet your monthly mortgage repayments before being told about an imminent rate hike you’re likely to find the news especially concerning.
If you are worried that the increased cost will make keeping your home unaffordable, read our guide: How to Avoid Repossession for more guidance on how to cope if you’re finding it difficult to pay your mortgage.