In the face of soaring inflation, homeowners find themselves grappling with the mounting challenge of managing their mortgages amidst rising interest rates. This has left countless homeowners apprehensive about the consequences of escalating rates as monthly mortgage payments and the overall cost of mortgages continue to surge.
In this article, we present practical tips on how to prepare for rising mortgage interest rates. Whether you’re bracing for an imminent increase in your mortgage payments or already experiencing the effects of a higher rate, these tips can help you effectively manage your finances in the changing economic landscape.
Tips for managing an interest rate rise on your mortgage
As interest rates on mortgages continue to rise, it’s essential for homeowners to be well-prepared and equipped with effective strategies to manage the impact on their finances. Here are seven valuable tips to navigate through the challenges of rising mortgage interest rates.
1. Boost your mortgage repayment with overpayments
Making overpayments is a powerful strategy to reduce your mortgage burden. Traditionally, overpayments were made in larger chunks or through committed direct debits. However, with innovative free apps like Sprive, you can now chip away at your mortgage based on your spending habits. By setting monthly limits as low as the equivalent of less than £1 per day, you can make incremental progress towards paying off your mortgage sooner.
Consider this example: By making a modest monthly overpayment of £25 on a £250,000 mortgage at a 6% interest rate over 25 years, you could save £9,430 in interest. You can use an online calculator to visualise how much interest you could save.
Before making overpayments, there are a few things to consider. You must have enough emergency cash, you’ve paid off more expensive debts first, and that you don’t make overpayments that exceed your permitted overpayment allowance.
2. Pay off your mortgage while you shop
If you find yourself in a position where making additional overpayments is challenging, automated microsaving can be the solution to chip away at your mortgage. By signing up for the Sprive app and pausing the auto-save feature, you can utilise “Shop with Sprive” under the rewards tab. This feature allows you to earn extra money towards your mortgage while shopping with partner brands. You can easily accumulate same-day cashback from your everyday shopping at popular stores like Asda, Sainsbury’s, Morrisons and M&S. Then, conveniently use it to make mortgage payments with just one tap. Regular use of this feature could yield substantial savings.
Just consider an example of a weekly family shopping trip amounting to £150. With a 5% cash back at M&S you could save £11,210 in interest on a £250,000 mortgage at a 6% interest rate over 25 years. To estimate how much you can save on your mortgage you can use the Sprive online calculator.
3. Improve your loan-to-value ratio (LTV)
Your loan-to-value is the size of the outstanding mortgage amount in relation to the value of your home. Your loan-to-value ratio is crucial in determining the mortgage deals available to you. The easiest way to reduce your LTV is to make overpayments. Whenever your LTV goes down by 5%, you will usually unlock a better mortgage product with a lower interest rate, with the best rates typically offered for homeowners with LTVs under 60%. If you can afford to make overpayments, it can be an effective way to reach the next LTV threshold when you next remortgage. This will then save you on interest by securing a mortgage deal at a lower rate.
4. Maintain a healthy credit score and avoid additional debt
To position yourself for the best mortgage deals, it’s essential to avoid taking on any unsecured debt, i.e. ‘bad debt‘. In addition, it’s not a bad idea to work on improving your credit score. A strong credit profile gives you the best chances of securing favourable mortgage terms when you next remortgage. Free services like Clearscore are great to help you get better visibility of how you can improve your situation.
5. Shop around when remortgaging
When the time comes to remortgage, don’t settle for the first deal that comes your way. As the first step of the remortgage process, shop around and consider the total cost, not just the interest rate. Utilise free online remortgage tools to explore live deals and find the most suitable option for your circumstances.
It’s wise to start researching six months before your current deal expires, as rates can change rapidly. You may be tempted to reduce your monthly payments by extending your mortgage term. However, be aware that doing so will significantly increase the amount of interest you pay over the long run. It’s a good idea to speak to a mortgage expert you trust to help you get the best possible advice. There are now many high-quality advisors out there who do not charge advisory fees, so it’s worth spending the time finding one.
Related: Can I remortgage early?
6. Monitor interest rates closely
In these dynamic times, interest rates may fluctuate, and the Bank of England might make adjustments based on inflation levels. Keeping a close eye on interest rate movements can be advantageous. If rates start to drop, it might be financially beneficial to exit your current deal early and pay an early repayment charge. The Sprive app can provide you with calculations and alerts when it may be an opportune time to consider this. By taking advantage of potential rate decreases, you could save a substantial amount of money over the course of your mortgage.
7. Consider mortgage protection
During these uncertain times, you may want to protect yourself and your home, in the event of job loss or illness. When remortgaging, take the opportunity to discuss mortgage protection options with an advisor. Having adequate cover, when mortgage rates are so high might give you peace of mind in case the unexpected happens.
Conclusion: How to prepare for a mortgage interest rate rise
Getting ready for rising mortgage interest rates is crucial to secure your finances and save big in the long run. Mortgages may seem overwhelming, but even small actions can make a huge difference. So, try making extra payments, grab those cashback rewards from your regular shopping, improve your Loan-to-Value ratio, keep your credit in good shape, and shop around for the best remortgage deals. These smart moves will not only soften the impact of rising rates but also lead to substantial savings over time. Being proactive and well-prepared will help you tackle interest rate changes with confidence and ease.
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