On May 5th (2022) The Bank of England increased its base rate from 0.75% to 1%, a level not seen since 2009. This seems to have caused mass panic. So - what’s the implication and what do you ideally need to do?
Believe it or not, presently (May 2022), we need to understand that interest rates are still comparatively low. It’s just that that, since the last recession of 2007/8, The Bank of England has held the base rate at an unprecedented low level. Nonetheless, many first- time buyers won’t remember this or indeed won’t have experienced interest rates of a pre-2009 level and it’s wise to both understand the implications and to take the necessary precautions, with your personal finances, so that you’re in good shape to face any subsequent interest rate rises.
According to the credit app ‘Total Money,’ a rise of 1% above the 0.1%, at which the base rate was sitting for most of 2021; will increase mortgage payments by £99 per month OR £1,188 per year based on a 75% LTV (loan- to- value) mortgage on the average UK property costing £270,708.
With just 17% of mortgage debt now on a floating rate, the vast majority of UK borrowers are isolated from a rise in interest rates until their fixed rates expire. If you haven’t fixed rates already, now is the time to do so and there are still some very good 2- and 5-year fixed rates available.
Whilst the recent rise has created a surge of people fixing for 10 years, we believe this is too long a period to commit to! A lot can happen in 10 years!
So, here is our advice in getting yourself in good shape to tackle further base rate and subsequent interest rate increases and to combat inflation:
- Talk to an independent mortgage specialist; look for one that offers free unbiased advice. Get a fixed 2- or 5-year rate BUT don’t go for a 10-year fixed rate! There are plenty of 2- and 5-year products out there. You will need to assess and balance out those products that have a front ended fee against the interest rate and cost of the mortgage over the 2-to-5-year period against those products without font-ended fees.
- Cut back or if possible, eliminate expensive credit lines such as overdrafts and interest-bearing credit cards. If you have credit card balances and you are unable to pay them off in one go, look at moving the balance to a 0% card.
- Look where you shop for groceries!! This might sound a bit patronising in terms of advice BUT it’s surprising how many of us, for convenience, go to the nearest supermarket. Try and plan a weekly shop rather than picking up random items, throughout the week – on the go; this is always an expensive way of shopping!
- It might well be that a certain cheaper supermarket is a further 3 miles to travel, but that extra in fuel and time is easily offset if your weekly trolly load is 20% / £12 cheaper!!! Over a month, this equates to a saving of almost £50!
- Use your heating more sparingly. Put it on in the morning and perhaps in the evening as required and if you are working at home all day and you find yourself chilly simply put some extra clothing on; there is no point heating an entire home whilst everyone else is out!
- If you have a spare room, you could consider renting it out. The UK average figure for renting a room is currently £600 a month and as long as you don’t exceed £7,500 a year you won’t need to pay any tax.
These seemingly small changes, when added up could save you anywhere from £60 to £150 a month! Combine this with the peace of mind of knowing, for the next 2 to 5 years, exactly what your monthly mortgage payments might be and you will find yourself in a much better position to combat both increased mortgage rates and inflation in the sound knowledge that any savings will be incurring a better rate of interest!
For further advice on a fixed mortgage rate that’s best for your personal situation, contact Dunham McCarthy.