When Bank of England Base Rate goes up – and it will do sometime over the next few months – mortgage rates are destined to rise. If you have a tracker or standard variable rate mortgage your monthly payments will increase, which could put a strain on some people’s finances.
Paul Broadhead (left), head of mortgage policy at the Building Societies Association, offers some advice for those who worry that mortgage arrears may be looming.
It is more than five years since the Bank of England Base Rate was cut to 0.5 per cent. Many of us with a mortgage have got used to monthly payments well below those typical when the Base Rate was nearer its more normal 5 per cent.
Once the Monetary Policy Committee of the Bank of England believes that the UK economy is in sustainable recovery, the Base Rate will start to go up and mortgage rates will follow. It could happen this autumn or sometime next year – no one knows.
The good news is that the Bank of England has been clear that it expects the new normal for the Base Rate to be nearer to 3 per cent than 5 per cent. It is also likely that rates will rise gradually.But for those on a variable rate mortgage this will still mean increasing monthly costs when many households are already squeezed because of rising bills.
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Some simple changes can help prevent or minimise payment difficulties:
- Have a household budget and as far as possible stick to it
- If a problem arises and you are in debt – don’t ignore it
- Don’t panic, there are organisations out there who can help
- Building societies and banks will do everything they can to keep you in your home.
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As well as rising household bills, changing family circumstances are the most likely cause of payment difficulties. Events like retirement or a new addition to the family can usually be planned for, unlike bereavement, relationship breakdown or unemployment. It is often these unexpected life events that cause difficulties.
Budgeting
Looking at your bank balance and realising that this month’s pay cheque has disappeared even faster than last month’s is, to put it mildly, disheartening. Especially if you were planning to cut back and attempt to make your money last longer.
However, we often bury our heads in the sand, thinking things like, “Well I forgot that this month was going to be particularly expensive, there was a friend’s wedding, plus the car tax and the quarterly gas and electricity bill, all that explains my rapidly disappearing bank balance. Next month will be easier.”
The first step towards making next month easier is to do some thorough and honest budgeting. Setting a household budget needs to take account, as far as possible, of those one-off payments as well as regular monthly expenditure.
Most of us have experienced the “Murphy’s Law month”, when everything lands at the same time. This can result in playing catch up for the rest of the year. It may even force you into borrowing more, sometimes at a higher rate of interest, to tide you over. Whilst juggling bills can be difficult, if taking out additional borrowing is avoidable, that’s clearly preferable. If not, you should immediately factor the payments into your budget so that one blip does not result in a spiralling debt and a permanent increase in outgoings.
Identifying essential costs and those which are less important, or are nice-to-haves, is a task that we often avoid but it can be a real eye opener. The essentials will include your mortgage or rent, utility bills, and insurance, food and transport costs.
Average out these costs and allocate them to a monthly budget. Then add in other items, which could include socialising, holidays and gifts. There are lots of budget planners available – look at websites like adviceguide.org.uk, moneysavingexpert.com and moneyadviceservice.org.uk.
Cutting general household costs
The process of budgeting will also highlight which things can and perhaps have to go from your monthly spending if it is squeezed. Even question some of the essential items. For example, could a change of supermarket for your groceries provide a bit more breathing space? Booking travel in advance can often save significant sums, as can shopping around for insurance or utilities.
Your home
For most people their mortgage repayment or rent is the single biggest monthly expense. Recently, many homeowners have opted to buy their property with a fixed rate mortgage.
This can provide peace of mind at a time of rising interest rates as the rate stays the same for a specified number of years – typically between two and five, although some last longer.
When your fixed rate is coming to an end you need to take action. If you do nothing your mortgage might move onto your lender’s standard variable rate which often costs more. Talk to your lender, shop around through one of the comparison websites or take a trip down your local high street. This can save you money.
It is very likely that interest rates will rise quite soon. If your mortgage isn’t on a fixed rate it is worth budgeting for a rise in rates now. Using a mortgage repayment calculator, available on most lenders’ websites, will give you a good idea of how much your repayments could increase by.
If, for example, you took out an average mortgage of £144,000 today, on a capital and interest basis with a 25-year term at an interest rate of 3.75 per cent, your repayments would be £740 per month. A 0.25 per cent rise in interest rates would increase your repayments by £20 each month to £760. A 1 per cent increase would see your monthly payment go up by £80 a month. How would this affect your budget?
If you are worried that this kind of increase just isn’t affordable, then now is the time to look at your options. Get advice from your lender or broker to see if fixing your interest rate is the right option for you. Usually there will be a fee for applying a fixed rate to your loan, so like all things it’s worth comparing the options. Fixing your rate doesn’t mean you will get the lowest rate but it will offer some certainty in your payments and allow you to budget.
Can’t pay? Don’t ignore the problem
If you have a mortgage and are already having problems paying it in full and on time or think that this may happen, don’t panic – but do contact your lender immediately.
Contrary to popular myth, lenders are not looking to repossess your home as soon as you have a problem. In fact, they are keen to work with you to help you stay in your home – repossession really is the last resort.
Lenders have a range of tools they can use to help. Every case is different and the lender will be looking for the most appropriate solution for you, whether that is a temporary repayment holiday, an extension to your term or something else.
Sometimes looking at your finances more broadly can help. For example, restructuring any unsecured lending such as personal loans and credit cards may help to ease the pressure. There are solutions out there and experts waiting to help; the sooner you look for them the more likely it is that you’ll avoid getting into real financial difficulty.
Free independent help and advice are available from many organisations. They can help you prioritise your debts and consider if there is any additional support available to you. Facing up to difficulties at the earliest opportunity is the first step to overcoming them. Amongst others you could contact StepChange, Citizen’s Advice or National Debtline, but do talk to your lender too.
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Coping with arrears at the Cambridge Building Society
“From time to time some borrowers do get into arrears. Recently we had an individual who stopped replying to our letters and phone calls, so we decided to send someone to his house to make sure he was okay.
“It turned out that he had been signed off work with anxiety and depression and had lost his job. He was in a difficult place and had nearly given up all hope of sorting the situation out.
“Our approach is to do all we can to help people like this resolve their difficulties with the ultimate aim of turning their situation around so they can stay in their homes – we certainly aren’t looking to ‘kick them out’ the moment they fall into arrears.
“In this case, debt management advisers met up with him in his local branch. We discussed his personal and financial situation and were able to reassure him that we could help. Following the meeting we arranged for him to make reduced payments on his mortgage to give him the time and space he needed to manage his situation, recover his health and get back on track financially.
“This is the email we got from him shortly afterwards:
‘Thank you so much! It’s a huge relief and your early support has been magnificent. I am immensely grateful to you for allowing me the time and space to resolve issues and the friendly non-judgemental way in which you have maintained contact.
‘Thank you for your professionalism and genuine human kindness at an overwhelmingly difficult period in my life. I should probably say that I am forever in your debt, but thankfully I will not be!’ “
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