A number of you have contacted us recently with concerns about rising interest rates. Now we’re not economists, but what we do know is that rates have remained fairly static over the past few months, with fixed rates for 1 to 2 years sitting in the mid 4’s, while the longer term 4 and 5 year rates sitting in the mid to late 5’s. Although these rates are still at historical lows, they are certainly an increase on last year.
So, what if the rates do increase further? Well you might be surprised to know that behind the scenes we, as advisors, and the banks always have to take into consideration the future ‘what ifs’. So here are a few things that go on behind the scenes to ensure you are protected……
When your mortgage application is assessed we have to factor in the potential rise in interest rates, so as a precautionary measure lenders require us to test your affordability at a higher rate. As an example the current interest rates are around 5%, but if you were to put in an application today the bank would assess the loan based on an interest rate of somewhere around 7.5% (these vary from bank to bank). You can be sure that if interest rates did increase to around 7.5% then we would need to test your affordability at close to 10%!
Additionally, after your income and expenses have been factored in, there has to be some surplus money left over, known as your Uncommitted Monthly Income (UMI). The amount of surplus required depends on several factors such as the amount of money being borrowed, if you have children, and the amount of equity you have in your property. Having this surplus in place allows for a buffer should your loan repayments increase.
At the time of finalising or reviewing your loan structure your advisor will work with you on a loan structure that not only suits your financial goals but also looks to minimise the impact of rate fluctuations. For example we might look to split your total debt across a range of facilities which could include, fixed, floating and off-set products.
Ensuring your loan is structured right could be the difference between your loan being affordable and un-affordable in the future. If you want to future proof your loan, get in touch to arrange a free mortgage review.
Who do you know that could benefit from a chat to one of our mortgage advisers? Most people don't keep track of their mortgage and the interest rates they pay - so a chat with an adviser could be a great opportunity for them to make sure they are on track and paying off their loan as fast as possible.