The Bank of England's decision to keep interest rates at a record low for the time being means mortgage holders can be safe in the knowledge that their repayments won't be increasing this side of Christmas. Forecasts now suggest the interest rate tide will begin to turn in late 2015 or even 2016. But, when they do rise, homeowners will need to be vigilant as increasing interest rates mean higher mortgage repayments for many.
So what can homeowners do to safeguard against a rise in rates?
Our recent survey of mortgage holders in England and Wales indicated that almost half aren't certain of the current interest rate of their loan. The survey of 1000 people revealed that, while 87% of mortgage customers can state the amount they repay each month, 48% aren't able to recall their interest rate with absolute certainty. This is surprising given that 61% of those surveyed said that the interest rate was their primary reason for choosing a particular mortgage in the first place.
The key is to know your product, know your circumstances and know what's on the market.
Many of us have become experts at tightening our purse strings - it's not uncommon these days to scour the reduced section at the supermarket, think twice before buying non-essentials, and choose a staycation over holidaying abroad. Yet this approach doesn't always apply when it comes to knowing the ins and outs of our mortgages.
Thankfully, the survey showed that mortgage customers are more confident when it comes to other basic facts about their product, with 95% able to name their mortgage provider, 74% knowing the total they owe and 76% being aware of the date by which the mortgage will be repaid.
However, our research also showed that 12% of people don't know the difference between a fixed rate and variable rate mortgage. If this is you, take ten minutes to research it and find out, as this small bit of information could save you hundreds of pounds.
But, in summary, if you have a variable interest rate mortgage, the amount of money you pay each month is at the mercy of the lending institution following any changes to the Bank of England's interest rates, so you'll need to factor any changes into your monthly budgets.
While if you're on a fixed rate mortgage, you'll pay the same amount each month until the term of your mortgage ends. But you need to make sure you can afford the new rates when you come off your fixed-term, as this is when a rate shock can really hurt. However, more recent borrowers can take some comfort from the fact that most lenders have been assessing borrowers' ability to pay at higher interest rates for some time.
Surprisingly, our survey showed that only 76% of those quizzed were aware that a rate rise would be bad news for their mortgage-holders - with 5% actually thinking it would be a good thing. In real terms, a quarter per cent rise on the estimated average mortgage of £113,549 equates to around an extra £23.66 per month*, which will be manageable for most. But if you get on top of things now and make sure your mortgage rate is competitive, you may be able to save yourself from losing out when interest rates rise further.
For some it's important to consider re-mortgaging as a serious option as it may be better in the long-term, yet the Principality survey also indicated that more than one in five mortgage customers never change their mortgage. A mortgage should not be seen as a lifelong arrangement; the product that was right for you when you took it on may not be right for you now and you should consider it carefully or discuss it with a financial adviser to make sure you are getting the right option for you.
In essence, the key to responsible mortgage management is to be proactive and not reactive. Take time to familiarise yourself with the key facts of your mortgage and arm yourself with the knowledge to shop around for the most suitable product for your personal circumstances.
With a Bank of England rate rise expected late next year or early in 2016, now is an opportune time to get informed about the finer details of your mortgage. Once you've got your head around it, you will be well-placed to get yourself through the interest rate rise without too much impact, and potentially with more money to put aside for the things you love.
Graeme is Chief Executive Officer of Principality Building Society.
*Based on an estimated outstanding mortgage of £113,549 using data from The Money Charity Debt Statistics January 2014 Edition.