Are You Prepared to Lose Your House or Keep It?

 The Rate Rise Shock

It’s been 10 years since the government starting dropping the base interest rates in the UK. It was now at its lowest ever rate (0.25%) for around 300 years. Many homeowners perceived these low rates as the norm, even though some were still struggling to make monthly payments and juggle their finances accordingly. On the 2nd November 2017, the Bank of England put into effect an increase in the base rate to 0.5% shocking many people who have come to rely on rates being extremely low.

What many have failed to realise is that this low rates policy was actually a response to a state of emergency during the financial crisis of 2008 and was never intended as a permanent, fixed solution. Therefore, and unfortunately for many homeowners, the UK has been lulled into a false sense of security during the last ten years. Rates may now inevitably be on the rise and could possibly not return to the unrealistically low numbers we have grown accustomed to.

So the question is… how will you cope if interest rates rise?

This is a key question homeowners should be asking themselves and planning for!!!

Will you have a financial cushion, or are you prepared to lose your house?

It might look like a dire situation for those currently struggling to make payments at these low rates especially as the Bank of England have hinted of one or two possible rate rises in early and late 2018.

Research by L&C Mortgages released in the first quarter of 2017 showed 1.4 million UK home owners were struggling to pay their mortgage, despite record low interest rates.

It also showed 2.5 million admitting they were forced to make significant cutbacks to reduce their spending in order to afford their mortgage payments.

Finally, more than a third (36 per cent) of homeowners were still on a standard variable rate mortgage, leaving 4 million vulnerable to a rise in interest rates.

Are some homeowners at risk of losing their homes following the rise in increase rates? This highlights a fragile and vulnerable portion of society still existing despite the tentatively recovering economy: a portion defined as those with mortgage payments in excess of 35% of pre-tax income. As households pay mortgage payments out of their post-tax income, this would mean around half of available income would consequently be taken up by mortgage payments once income tax and national insurance are deducted.

To examine this in more detail, we’ll take an example:

Consider an individual with a mortgage of £150,000. (Of course this figure may be a great deal lower than today’s housing market, but for ease we’ll use rounded, easy to understand figures to simplify any calculations.

  • At a rate of 3%, this would mean that monthly repayments would total £717.
  • If your mortgage rate increased to, let’s say 5%, over the next year or so, the monthly payment would significantly increase to £887.

How would you cope in this situation? The extra money has to come from somewhere and, for you and your family, money may be tight. For some people, this situation could potentially herald stress and possible bankruptcy.

Where will that leave you? When you examine your personal finances and mortgage situation, are you:

  • Well off – an increase here or there does not bother you as you are in a healthy financial position
  • Comfortable – you have savings and funds left over at the end of each month
  • Breaking even – your income equals your expenditure
  • Struggling – you often have no money left at the end of each month and need to use debt to cover your expenses

If your answer is that you cannot cope or are barely getting by, how will you deal with higher interest rates?

Fear not, here are a few suggestions and solutions:

In order to best protect ourselves from this rate rise situation, we all need to start planning for this rise now in order to secure our homes and financial future, no matter who we are or where we live.

The Bank of England is giving home owners the chance to adjust their finances accordingly by highlighting a possible rate rise or two in 2018. No matter what situation you are in, there is a way to begin financial preparation in advanced of possible increased interest rates:

  • A number of individuals can go ahead and fix their interest rates for two, five or even ten years and lock in reasonably low rates.
  • For others they may be more than able to handle rising mortgage costs
  • Some people should honestly examine their true financial situation and consider whether they can increase their income or reduce their expenses to afford the homes they live in.
  • While for several, it may be the best option at this stage to consider downsizing your property before you and your family face a much more desperate and serious situation.

It is good to seek advice to make sure you are on the best deal and see if there is anything that can be done to relieve the stress of managing high mortgage payments.

It all comes down to one question – what is PEACE OF MIND worth to you? A house and home is important to everyone, no matter who we are, what we do or where we live. It’s our safe haven from an uncertain world, where we spend most of our time and share some of our most precious memories. Though the world economy may seem uncertain at times that does not mean we have to allow those circumstances to dictate our financial situation. With proper financial planning and thought we should be able to get the best out of our homes and situations. 

Unfortunately, the unavoidable fact is that it’s now time to leave our ten year safety bubble and face reality.

 

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