Published 22nd June 2023
So, it has been announced that the Bank of England has raised the base rate from 4.5% to 5%, the highest level since 2008. With this latest news, you may be wondering, “How will this affect my mortgage affordability?”. First things first, don’t let the headlines dampen your mood; understanding it all can actually empower you to make smarter decisions for your financial future. So, let’s dive in!
Now, let’s demystify what ‘interest rates’ and ‘mortgage affordability’ mean in simple, non-jargon terms. Interest rates are like the ‘rent’ you pay for borrowing money. It’s a percentage of the loan that the lender charges you for their services. Meanwhile, mortgage affordability is how much you can borrow to purchase a house without overstretching your finances. It’s all about finding a balance so you can still enjoy your morning lattes and annual holiday while paying off your home.
So, how do these two concepts intertwine we hear you ask? When interest rates rise, the cost of borrowing increases. This means that the monthly mortgage payment for any new home loans would also go up. Imagine trying to fill a bucket with a larger mug, but the bucket size remains the same. You’ll have to be careful not to overflow. Here, the bucket represents your budget, and the mug is your monthly mortgage payment.
But wait, before you worry, let’s get one thing clear: If you already have a fixed-rate mortgage, this change will not affect you! So, breathe a sigh of relief! The interest rate was determined when you signed your loan, so even if interest rates rise, your mortgage payments remain the same during the whole term length of your fixed-rate, whether this be two years, five years or ten years.
However, if you’re planning to get your first mortgage, looking to remortgage or are currently riding the waves of an adjustable-rate mortgage, also known as a Standard Variable Rate (SVR), this is where you might need to do some calculations. But don’t worry, you’re not alone! There are a number of mortgage advisors out there who will be able to help you, and following their advice could really pay off! At HLC we have a whole team of friendly, experienced and knowledgeable mortgage advisors who are here to help you through what may feel like a worrying time. They have access to the whole of the market and are up to date with the best mortgage products and deals out there, including fixed-rate mortgages still under 5% (June 2023), but we urge you to act now, fixed-rates are changing constantly and a product that is available today, may not be available even the next day. If you find a deal that’s affordable, lock-in now so you know where you stand for the next two to five years.
If you’re currently searching for property, then your AIP and affordability may need to be reviewed. With higher interest rates, you may be able to borrow less than before to keep your monthly payments affordable. This is where the ‘mortgage affordability’ part comes into play. Your ideal home budget may have to shrink a little to accommodate the increased costs, or you may have to be willing to extend the length of your mortgage term in order to bring your monthly payments down. But remember, this doesn’t mean you can’t get your dream home; it may just involve a bit more searching, negotiating, and perhaps compromising.
So, what can you do in the face of rising rates? Here are a few helpful strategies:
- Budget Wisely: Re-assess your home buying budget with the new interest rates in mind. It’s always better to buy a home you can comfortably afford, rather than stretch your finances thin.
- Shop Around: Interest rates can vary between different lenders, so make sure you explore multiple options. Don’t be afraid to negotiate and ask questions. And remember, a mortgage broker will have access to the best deals across the whole of the market.
- Consider Fixed-Rate Mortgages: These types of loans protect you from future interest rate increases, providing more predictability for your budget.
- Boost Your Credit Score: A higher credit score can help you secure loans with better terms, potentially mitigating some effects of rising interest rates.
- Make a Larger Down Payment: This can reduce the amount you need to borrow, which could make the higher interest rates more manageable.
So, while rising interest rates can impact your mortgage affordability, it needn’t be a gloomy scenario. By understanding these dynamics, making thoughtful decisions, and taking positive actions, you can still safely secure your dream home.
Remember, acting now offers a chance to secure a deal you can afford. And with rates currently on the rise, acting sooner rather than later is advisable.
If you’d like further advice or help with finding the best deal on the market for you, contact one of our friendly mortgage advisors now.