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In recent years, increases in house prices followed by interest rate rises have left homeowners with soaring mortgage costs.

Coupled with rising living costs, and higher energy bills, many homeowners are seeing a higher increase in their day-to-day living costs, alongside their typical fixed monthly costs.

As interest rates continue to climb, in the hope to bring down inflation, the effects on mortgage borrowers are becoming more pronounced.

We’ve put together five helpful tips for homeowners, to help them navigate this tricky landscape.

But first, the fine print. This article won’t give you personal advice, but it can give you helpful tips so that you can feel more informed. If you’re not sure if something is right for you, you can always look at taking advice through Unbiased. If you’re worried about your mortgage repayments, speak to your mortgage provider. They may be able to offer you advice.

How interest rate rises are costing homeowners

Interest rates play a pretty vital role in the financial health of homeowners. As interest rates continue to rise, in order to reduce inflation, borrowers are feeling the effects.

There are different ways that interest is charged on the money you borrow to purchase your home. Not all providers may offer these options to you, so it’s best to check with yours, especially if you’re due to remortgage soon.

  - Variable rate. The interest rate can change at any time. Often variable rates are linked to the Bank of England Base Rate and as it moves up and down, the interest rate you pay moves up and down

  - Fixed rate. Your interest is fixed for a set period of time (often 2, 5 or 10 years), which changes to a variable rate at the end of the fixed rate period

Variable rate homeowners will have seen their mortgage repayments rise almost a third from June 2022. Paying on average £1,096 in August 2023, compared to £776 per month back then.

And it’s not plain sailing for fixed rate homeowners either. With the average two-year fixed-rate mortgages climbing to 6.12% for first-time buyers and 5.86% for those remortgaging.

There are many different factors which affect interest rates and the truth is that nobody knows for sure what’s going to happen to them in the future. Borrowers therefore always face a difficult decision as to what is best for them.

Taking a variable rate allows borrowers to take advantage of any falls in interest rates, but risks costs going up if rates rise. A fixed rate provides certainty for the fixed period, with the longer the fixed period the longer the certainty. The risks of a fixed rate are that borrowers won’t benefit from any falls in rates during the fixed rate period and that interest rates could be much higher when the fixed rate ends.

The impact of rising interest rates and living costs on homeowners

Not only are homeowners having to worry about mortgage payment increases, the everyday cost of living increases also loom.

Metropolitan areas in the UK are seeing council tax rises of up to 6.2% on average. And the average UK customer will see their energy bills rising to almost £900 a year (standing charge not included).

As interest rates rise, and inflation stays relatively high, this leaves little wiggle room for essential expenditures, such as utility bills, groceries, and childcare expenses.

As everyday expenses increase, homeowners are faced with the dilemma of reallocating funds to cover their essential living costs. For some, it’s all in their stride. But for others, this can lead to limited savings and reduced spending. Especially when it comes to investments. Some investors might find they need to reduce their regular investment amounts. Or even take a temporary break from regular investments altogether. This can negatively impact future goals and plans that investors have set for their future.

With employers planning to increase pay by 5% over the next 12 months, coupled with lower mortgage rates, there could finally be a positive payoff when it comes to living costs and mortgages in the near future.

5 tips to help navigate interest rate rises for homeowners

  1. See if you can switch to a better mortgage deal

    If you’ve been on a fixed or variable rate mortgage that’s nearing its end, be aware that you could flip onto your provider’s standard variable rate. This is often a lot higher than other options they may provide you. You could also look at switching to a different provider.

  2. Pay off any short-term debts and overdrafts if you can

    Might seem an obvious one, but reducing your monthly expenditure down as much as possible can help. This might mean saving slightly less one month, but you’ll find that the money you’re then paying in debt can go back into your savings, or can help with daily living costs.

  3. Build up your emergency cash fund

    Think about building up an emergency cash fund. This might mean making some lower-cost swaps in the short-term, but you’ll benefit for two reasons. Firstly, if you need some money, you won’t have to dip into your investments, allowing them to grow for longer, meaning they can weather any ups and downs in the market. Secondly, you’ll have more available to you in an easy access account for when you need it.

  4. Consider making overpayments to your mortgage

    If you’ve got your emergency cash fund sorted and you’ve checked with your provider, you could think about making overpayments on your mortgage. You could benefit from this by repaying your mortgage earlier than expected and paying less interest. Make sure you check what early repayment charges apply on overpayments before making any – most loans allow at least some overpayments without any charges.

  5. Don’t stop investing- even if you have to reduce the amount

    A knee-jerk reaction that many people have is to stop investing and pocket the cash ‘just in case’. This is where building an emergency cash pot comes in handy. Even a short break away from investing could stand in the way of an investor reaching their goals. If you’re thinking about taking a pause, have a look at the minimum amount your provider will let you save each month. It could be as little as £25 per month, or 0.83p per day.

Figures and information correct as of 22nd August 2023

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