How can I reduce the impact of higher interest rates?
With the Bank of England base rate at 5.25%, many homeowners needing to remortgage are understandably concerned about the affect higher interest rates will have on their monthly repayments and what they can do to reduce the impact.
One way to lower your monthly payments is to extend the length of your mortgage term. Increasing your term by 5 or 10 years will spread the cost over a longer period and make your payments lower. This can provide welcome short-term help with your budgeting, however it does mean paying more interest over the longer term and reverting to your original term is encouraged when your budget allows.
Switching some/all of your mortgage to an interest-only basis is a more drastic option and your payments will only cover the monthly interest due on this part and not repay any of the capital. This significantly reduces your monthly outgoings short term, but you will need a strategy of how to repay the mortgage at the end of the term. Investing in a separate repayment plan is one idea, but the most common is selling the mortgaged property and downsizing. Switching to interest only will increase the amount of interest you pay over the term and reverting to a repayment mortgage when your budget allows is recommended.
Mortgages today are more flexible than ever and typically come with a free annual overpayment facility. This can be dovetailed with both increasing the term and switching to interest only, as when your finances allow, you can make a lump sum payment off of the loan to reduce your mortgage balance. Even small overpayments add up over time and say you overpay by £100.00 per month on a £150,000.00 mortgage, this could reduce your mortgage term by around 3 years and the amount of interest payable. Utilising overpayments is a good idea but should only be considered when you are 100% sure as recouping the overpayment can be tricky and laborious and is not guaranteed to be given back
Consolidating debts (credit cards or loans) into your mortgage can simplify repayments and is typically a good short term answer to help your budgeting. However, you need to consider whether extending the term on your debts is prudent and often increases the total interest payable. Furthermore, if you are securing unsecured loans or credit cards to your property and you fail to make those repayments, you will be at risk of losing your home.
In summary, there are a number of options you can potentially utilise to offset some of the impact of higher interest rates when remortgaging. Risks and costs apply with all of the options and we recommend you carefully consider your own financial situation and speak to a qualified adviser to help find one that best suits your needs and circumstances.