Don’t wait for a rate rise before you take action

by Alexander Beard, on Dec 2, 2014 8:51:35 AM

Responding to the 2nd October 2014 message to consumers from the Money Advice Service (MAS) to plan ahead for future rises in interest rates, the Council of Mortgage Lenders suggests some practical steps that consumers can take now to help prepare for future rises in interest rates.

While the MAS research suggests that many people have not yet taken steps to plan for higher interest rates, CML research shows that, for most people, gradual increases in rates are likely to be manageable, even if not entirely welcome! The CML suggests that if people take some sensible, practical steps now, most will be able to cope with what the Bank of England has previously flagged as a likely “baby steps” trajectory of rate rises, whenever they finally come.

The MAS research suggests that around half of survey respondents would find it difficult to cover up to £150 extra a month. But the CML points out that £150 equates to around a two full percentage point increase on an average mortgage – something that markets see as unlikely until much further into the future, and a level of rate rise which commentators would expect to see accompanied by a parallel growth in earnings. In the short term, a quarter point rise would add something around £16 a month to an average mortgage.

The CML has produced a set of ready reckoners showing the broad effect of rate rises on mortgages of various sizes and remaining term lengths – available through the CML website.

But the CML shares MAS’ concern about whether consumers are taking all the steps that they could to plan ahead for higher rates, and ensure that they are resilient to potentially higher payments on their credit obligations.

As a checklist, the CML suggests that it makes sense for all mortgage holders to:

  • - Remind yourself of what rate you are currently paying, whether it is fixed or variable, and when the deal and any associated early repayment charges expire.
  • - Use the MAS mortgage calculator to work out what rate rises of different sizes would mean for you, and make sure you could cover this additional amount.

CML Head of External Affairs, Sue Anderson, says:

“Although we don’t know when rates will rise, the monetary authorities have previously flagged that rises will be finely calibrated, so large sudden shocks are unlikely. By planning ahead now, mortgage holders can get a clear picture of what a rate rise would mean for their own repayments.

Taking steps in advance to work out what the effect on your payments might be, and planning ahead, will mean that most borrowers will be able to cope by careful budgeting. On an average mortgage of around £120,000, a quarter point rise would typically add around £16 to the monthly payment.”