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Interest Rates Rise: What Should You Do With Your Mortgage?

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samuel brent
Samuel Brent
Sam is a born and bred North Londoner. Growing up in Archway, attending primary school at Montem Juniors in Holloway, and secondary school at Acland Burghley in Tufnell Park. After success with his A-Levels at LA SWAP, he studied film at the London College of Printing (later the London College of Communication) in the Elephant and Castle and then Clerkenwell. This led to working with the Guardian in Farringdon, and a career in Journalism. After years of a miss-spent youth in Camden Town, Sam now lives in Belsize Park with his wife Marina and their two children, Esme and Primrose. Samuel enjoys Gardening and cycling, and is an avid Arsenal fan and works out of his office in Shoreditch.

The rising cost of living and rampant inflation is making it more probable that interest rates will rise again, which would put additional strain on consumers’ finances.

The Bank of England raised its benchmark interest rate to 1 per cent in May, the fourth rise in as many months and the highest level since 13 years ago. A subsequent increase is anticipated this week.

A £200,000 variable-rate mortgage would incur an extra £300 a year in interest charges if interest rates rise (2.25 variable rate).

Mortgage rates have increased steadily in recent months, and many new fixed-rate mortgages have included interest hikes.  It can be difficult to determine the right mortgage for your needs during a period of economic turbulence. Here are five ways to finance a home purchase.

Repayment Mortgages

The majority of mortgage types go into the repayment mortgage category, which is a type where you pay back a small amount of capital you’ve borrowed along with loan interest. You’ll outright own your house at the end of the mortgage contract. The two types of repayment mortgages are fixed-term and variable.

As the name suggests, a fixed-rate mortgage is set at a fixed interest rate for a set period and won’t be affected by the fluctuations in the Bank of England base rates. Normally the fixed rate set time is the first two, three or five years of the term.

Variable-rate mortgages have interest rates that can rise and fall which means that your monthly payments will fluctuate. The three main types of variable-rate mortgages include standard variable rate (SVR), tracker and discount-rate.

mortgage interest rates

First-time Buyer Mortgages

The biggest obstacle to first-time homebuyers is meeting deposit requirements.

With a 95% Loan-to-value (LTV home loan), you only need to put down a deposit of 5%. An LTV is the proportion of the home loan to the value of the property. For example, a mortgage of £190,000 on a £200,000 home has a 95% LTV and requires a £10,000 deposit to make up the 5% difference.

Banks became much more risk-averse during the pandemic, and many withdrew their 95% mortgages as a result. However, a guarantee provided to mortgage lenders in 2021 via a government initiative encouraged them to once again offer high loan-to-value mortgages.

Under the Mortgage Guarantee Scheme, major lenders such as Barclays, Santander, Lloyds, NatWest, Virgin Money and HSBC all provide 95% mortgages. The scheme’s closing date has been scheduled for 31st December 2022. We’d always recommend you use mortgage calculator tools to ensure you can meet your minimum payments.

Interest Only Mortgages

If you take out an interest-only mortgage, you pay only the interest for the duration of the loan. Be sure to plan for how you will pay off the entire loan at the end of your mortgage term, even if payments are initially cheaper.

They have fallen out of favour since the financial crisis, and before that, they were frequently misused. Interest-only loans have been harder to obtain since 2014. Some lenders do not offer interest-only loans, and those that do will have strict requirements like a substantial down payment and a suitable repayment vehicle.

UK Finance says that new interest-only lending, although still permitted, accounts for only a modest percentage of transactions. Only 32,000 interest-only loans were issued in 2021, fewer than three per cent of the lending in total.

‘Part and Part’ Mortgages

You can also get a ‘part and part’ mortgage, which allows you to pay down some of your debt but not all of it over time. You will still have to pay off some money at the end of the mortgage term.

However, It is important to get proper financial advice in order to understand the full ‘part and part’ set-up and any subsequent financial considerations.

Lifetime or ‘Reverse’ Mortgages

A lifetime mortgage, also known as a ‘reverse mortgage,’ is a tax-free cash release option for seniors aged 55 and over that is secured against your home and requires no relocation. An asset-based equity release gives you the means to continue living in your home while liberating funds that are tied up in it.

Interest on lifetime mortgages increases with time, so your debt can grow quickly whereas a conventional mortgage structure charges interest on an amount that falls with time. Since you do not make any repayments in a lifetime mortgage, the interest on the loan is continuously added to your debt.

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