Are Mortgage Rates Rising? Understanding Interest Rates and Home Loans

People have lots of unanswered questions when they start thinking about mortgaging a property to enable them to buy it. Perhaps not surprisingly, many of those questions revolve around interest rate’s influence on purchasing their first home. Affordability is of great importance when you are looking to buy your own home. Even if you can afford the repayments on your chosen loan now, it may not reflect the situations you may face in the future. These loans typically last over 25 years or more, this will be dependent on the needs of the person. No matter what the interest figures are doing today, you can assume they will change several times over the course of a quarter of a century – and not always in your favour. The best example from recent years would be the mid-eighties. You may be too young to recall. On Monday 14th January 1985, the Bank of England base rate was 11.875%. Just two weeks later, it soared to 13.875%. compare that with the historic low of just 0.25% that was announced on Thursday 4th August 2016 and you can see how crippling this was. Savers were happy, but those struggling to pay their loans were hardest hit.  They are changing frequently, but the Bank of England base rate is the best place to start. All lenders refer to this when calculating what they will charge on their home advances and other loans. As we mentioned above, the rate has dipped to a historic low point of just 0.25%. It stayed at that level for over a year between 2016-17. Even before that, it stalled at 0.5% for seven years. This has led to many people feeling comfortable that their home advances are at super-low interest rates. Some people may have taken out a home advance several years ago and have been used to a low interest rate on the product since then. Lenders are generally quite competitive with each other. That’s why we have seen in recent years a ‘race to the bottom’ where lenders tried to offer the lowest interest rates on the market. Some even dipped below 1%. However, as you read this, the amounts may be quite different from that. It depends on the economy, where the Bank of England base rate sits at present, and several other contributing factors. The point is, home loan interest figures change. If you are ready to look for a loan, search the market and see which options are available and what the likely interest rate might be. Remember that fixed-rate and variable-rate products will be quite different from each other.  Historically home loan rates go up and down over time. As mentioned previously, if you take out a loan over 25 years, you are going to experience ups and downs in the rate of interest you pay on that loan. When you are ready to consider applying for your advance, check the market to see what the likely interest rates could be. It doesn’t matter whether they have gone up or down recently; what matters most is whether you can afford the current rates as they stand. You may also want to consider a fixed-rate loan. This will usually provide a higher rate than a variable-rate option, but it is fixed for several years. This provides you with peace of mind, as you will be protected against any future rises when rates rise. Just as rates can go up, they can go down too, so yes, it can happen. All lenders want to attract new customers, so they will typically compete to ensure they have the best offers on the market. You can take advantage of this by shopping around. If you are currently saving for a deposit on a property, it pays to keep an eye on the home loans market as you do so. At the very least, it will make it easier to understand the ups and downs that occur. You can also begin to recognise any long-term trend in the market. Are lenders competing against each other to provide ever-cheaper loans? You can take advantage of this, so do shop around.  Possibly – the last rise was on 2nd August 2018, when the base rate rose from 0.50% – 0.75% However, it is important to remember the interest could rise again in 2018, 2019, and beyond. You simply never know. History has shown us the variations different generations have coped with. As we mentioned above, you can protect yourself with a fixed-rate deal. This will provide protection from future rises for the duration of your deal. As you come to the end of it, start looking around for another deal. Even if your monthly payments increase, you should be able to find a reasonable deal that will be fixed for another few years. This gives you insurance against future rises if they should occur. Everyone should ask themselves, ‘Are mortgage rates going to rise?’ If you don’t ask yourself this, you may be neglecting to prepare for that possibility in future.  This is the most important question of all. When mortgage rates rise, some people struggle to pay the increased amount due on their loan each month. This is less likely now thanks to the Mortgage Market Review that was introduced on 26th April 2014. This was designed to ensure people could no longer stretch themselves to their limit in getting a loan in the first instance. Now, you must be able to prove you can still meet your payments even if the interest rates were to go up. The review was initiated after the recession hit the UK in 2008. Many sources stated that home repossessions doubled in just 12 months. During that period, it was estimated that every seven minutes, another family lost their home. Those make sobering statistics, and they indicate how important it is for everyone to ensure they can manage their finances even if interest rates rise. The MMR rules were specifically developed to ensure what happened in 2008 never happens again. When you apply for a home advance, the lender you apply to will review your finances to determine whether you can afford to meet the required monthly payments. It’s important to recognise that even if you can meet them now, you must still prove you could do so if rates were to increase. You might have heard of the mortgage stress test – this is what it involves. So, even if you know you can afford the payments now, you may be turned down if the figures indicate you could no longer afford them if rates were to go up. That’s why knowing what the rates are now is only half the challenge. You must also prepare for all eventualities that may come your way. Home ownership is a dream. By planning and preparing as best you can, you stand a good chance of making sure it doesn’t turn into a nightmare.

Published on 6 August 2018

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