How Can Escalating Interest Rates Impact Your Mortgage?

The rate at which mortgage lenders in the market offer you loans is decided by the Bank of England rate. 2022 witnessed this rate increasing substantially, affecting the mortgage costs of several home buyers.

So, how do interest rates affect mortgages?

When you decide to purchase a house on a mortgage, the interest rate determines your purchasing power, affordability, and your mortgage costs over a long period of time. If there is an increase in these rates, it will increase your monthly repayments as well as the overall interest you pay throughout the life of your mortgage deal.

The only way to keep yourself safe from these fluctuations is to opt for fixed-rate mortgages. Most mortgages come with an initial fixed-rate term where the changing interest rates in the market do not impact the borrowers. However, once this term is over, the deal automatically converts into a standard variable rate mortgage where the interest you pay can dip and rise according to the Bank of England rate.

Considering this, several homebuyers look for a skilled remortgage broker to help them switch to a new deal before their fixed-rate term ends. This keeps them safe from dealing with erratic fluctuations and ensures steady mortgage repayments.

Here are a few ways in which an increase in interest rates impacts your mortgage:

Higher monthly payments

If you have not taken a mortgage yet, a rise in interest rates will cause your monthly payments to increase after getting a deal, whether it is a fixed-rate or standard variable. This is because your interest rate is locked in for the life of your loan, so when rates rise, your payments will increase to reflect the higher interest rate.

Longer loan terms

An adjustable rate mortgage (ARM) is a type of mortgage in which the interest rate can fluctuate over time based on market conditions. With an ARM, the interest rate is typically fixed for a set period, such as 5, 7, or 10 years, after which it adjusts periodically based on a specific financial index, such as the prime rate, the London Interbank Offered Rate (LIBOR), or the Cost of Funds Index (COFI).

If you have such a mortgage, your interest rate is subject to change at predetermined intervals. When interest rates rise, your interest rate will adjust accordingly, which could result in a longer loan term. This is because lenders will often adjust the loan term to keep your monthly payments the same, even as the interest rate increases.

Paying more interest

When you take out a mortgage, you will pay interest on the amount you borrow. As interest rates rise, the amount of interest you pay over the life of the loan is bound to increase. This is because your interest rate determines the amount of interest you pay each month, and a higher rate means you will pay more in interest over time. In short, an increase in the interest rates will push you to pay more for your deal than you bargained for.

Reduced buying power

If you are in the market for a new home, a rise in interest rates can reduce your buying power. This is because higher interest rates will increase your monthly mortgage payments, which means you will be able to afford less house for the same monthly payment. An increase in the interest rates will change your affordability, leading to new assessments which may not be in your favour.

Remortgaging becomes less attractive

As discussed above, remortgaging can keep you safe from dealing with fluctuations that come with a standard variable rate mortgage. However, even if you wish to continue with a fixed-rate mortgage, a rise in the interest rate will make you switch to a more expensive deal.

When interest rates rise, remortgaging your mortgage becomes less attractive. This is because you will have to refinance at a higher interest rate, which will increase your monthly payments and the total amount of interest you will pay over the life of the loan. If you are considering remortgaging, it is important to consider the current interest rate environment and whether it makes sense for you financially.

How to deal with increasing mortgage rates?

You do not have direct control over the Bank of England rates. When the interest rates increase, you have no option but to navigate through them in the best way possible.

Here are a few ways in which you can deal with increasing mortgage rates without letting your finances fall out of balance:

Adjust your budget

If you’re unable to remortgage or choose not to, you may need to adjust your budget to accommodate the higher monthly payments. This could mean cutting back on expenses, increasing your income, or a combination of both.

Pay down your principal

If it is possible, paying down your mortgage principal can help reduce the amount of interest you’ll pay over the life of the loan, which can help offset the impact of higher interest rates. This can also help you build equity in your home faster.

Make extra payments

Making extra payments on your mortgage, even if they are just a few pounds a month, can help you pay off your mortgage faster and reduce the amount of interest you will pay over the life of the loan.

Seek financial advice

If you are struggling to manage the impact of increasing mortgage rates on your finances, consider seeking the advice of a financial advisor. A mortgage broker adviser, a remortgage broker, or any other experienced professional can help you evaluate your options and develop a plan to manage your mortgage and other financial obligations.

So, there is little you can do to control the increasing mortgage interest rates. While obliging with the Bank of England and its decisions, you can do your best to minimise your expenses and switch to better mortgage deals to keep your mortgage repayments under control.