Continuing the series in which our Clinic experts provide a guide to those thorny issues that can trip up the unwary. This week, James Cotton on coping with rising interest rates: Interest rates have risen and I’m afraid they are going to get higher. How can I protect myself? The most obvious way to cope with rising interest rates is to opt for a fixed rate on your mortgage. This will protect you against any rises in interest rates over the term of the deal. Capped rates are also worth considering as they carry a cap above which the rate cannot go. What if I’m not on a fixed rate and still want to cut my monthly repayments? It is important to review your interest rate. Your mortgage is likely to be a substantial debt and remortgaging to get a better rate of interest can make a lot of difference. Many borrowers are not on an incentivised deal and are instead simply paying their lender’s Standard Variable Rate (SVR). SVRs are currently around 7.5 per cent – 2 per cent higher than the current base rate of 5.5 per cent. Best-buy deals are also about 5.5 per cent at the moment. By knocking 2 per cent of their interest rate, someone with a £100,000 interest-only mortgage could cut their mortgage payments by £166 per month or £2,000 per year. How do I go about it? Approach your current lender to see what they could offer you and shop around or approach a broker to see what else is available. Check that you are free of any Early Repayment Charges (ERCs). And if remortgaging is not an option? If your budget really is stretched and you cannot improve your mortgage deal for the time being, there are other ways of reducing your payments. If you have a repayment (capital and interest) mortgage, you could switch all or part of it on to interest only. Another alternative is to extend the term of the mortgage. Neither of these options is ideal as they both result in you paying more interest over the long term, however they can be used as a short-term respite. What happens if I get into trouble? It is essential that you address the problem rather than stick your head in the sand. If payments are tight, it is likely that problems will get worse, so nip them in the bud. Approach your lender and explain the situation – they should be able to offer help and advice. If not, organisations such as Citizens Advice can offer support.
James Cotton is a mortgage specialist at L & C (0800 953 0304; www.lcplc.co.uk).