Already, 2011 is shaping up to be a bad year for homeowners. The Confederation of British Industry (CBI) has warned that it believes interest rates will rise next year as the Bank of England moves to tackle inflation. The CBI estimates that rates, which have sat at a record low of 0.5% since March 2009, will rise to 1.25% by the end of 2011 and 2.75% by the end of 2012. So, homeowners need to be ready.
The key question is whether you could afford your mortgage repayments if rates were to go up. If the Bank of England rate rises to 1.25%, someone with a £200,000 tracker mortgage would see their monthly repayments rise by £83. A rise to 2.75% would put up those repayments by £270 a month. But even if you think that could tip you into financial trouble, don’t panic. There are several things you can do.
First of all, switch to a fixed-rate mortgage deal. It will be slightly more expensive than a tracker deal, in terms of the rate you’ll pay. But it gives you the peace of mind that your monthly mortgage payments will remain the same for the length of the deal. Two of the best available at the moment are Santander’s 2.65% two-year fix (available to anyone with a 40%-plus deposit with a £1,995 fee). Or there’s the Yorkshire Building Society’s five-year fix at 3.69% for those with a 40% deposit. The rate is 3.99% for people with a 25% deposit.
Also consider whether you can afford to overpay your mortgage a bit each month. If you can, this is well worth doing. The more you pay, the quicker you pay down the loan – in the long run that will save you interest and in the shorter term it will enable you to get better mortgage deals. The best deals are always reserved for the people with the lowest “loan-to-value” ratio – that means the people who have the highest personal equity, rather than debt, financing their homes.
If you are on a good tracker deal and have done your sums, and so know you could comfortably afford your mortgage repayments if rates rise, then it might pay to take the gamble and stick with it – especially if you got your tracker deal before the credit crunch. Those lucky people are on a mortgage rate of as little as 0.5% to 1% above the base rate. So they would need the base rate to rise to 2% before they would hit the same rate as the best fixed-rate deals. Once again, if you can afford to, overpay the mortgage. If you want to switch to a new tracker deal, First Direct is offering one of the best. Its lifetime offset tracker rates are at 2.59% for those with a 35% deposit and 3.09% for borrowers with a 25% deposit. Better still, the fee is just £99.