What can people do now to avoid a big shock when they come off their fixed rate mortgage?
The first thing I say to everyone is we will need to work to each household based upon what their wants and needs are, as everyone is different. There are a number of factors which will determine this so the most important thing is to understand what will work for you and your family for budget, flexibility and future plans. That said, there are some generic wins to help you adjust.
1) BUDGET
Go through your bank statements and establish what your essential and non essential items are. For example, mortgage, gas, electric, water, council tax are essential, where as general spending on ‘nice to have’ items are less so. This will help you, if you need to, work out where you can trim your costs most effectively.
2) Forecast
Now rates can vary depend on your circumstances, so it is always best to speak to a whole of market mortgage advisor, this will help establish what kind of rates and terms you are likely to attract for your circumstances and then you can apply this to your new budget. You want to make sure you’re achieving the right balance of all these and seeing what budget best fits you.
We have been enjoying prolonged, very low rates, with many people coming from rates around 1-2% which is likely to have a significant shift up. Combined with the cost of living, will now require a re-assessment of your budget, which is why building that first helps you then adjust more comfortably.
Here’s a link to a calculator to assist in working this out: https://rbmsolutions.co.uk/mortgage-calculator/
Some options are that you can either trim your non-essential outgoings, look to extend your term if you’re finding the monthly budget tight (being mindful this can increase the overall amount of interest you pay as the mortgage is now over a longer term) or, if needed, consolidate any debts together (again, seek advice on what is right for you here, as you can be securing previously unsecured debt onto your home putting it at risk if you don’t keep up with the payments and also stretching the debt over a longer term, increasing the overall amount of interest paid).
In some cases, people will consider ‘downsizing’ to a smaller property (or lower cost area), meaning a smaller mortgage to keep the costs down. Ultimately, doing what is right by your household overall.
Many people look to cancel their insurances when times are hard, which we would not advise as this can generally look to compound a problem. For instance, if you have an income protection policy but cancel it to save you the premium, then should something happen, you are left unprotected when you probably are in most need of this cover. Again, it is worth seeking advice to make sure you establish the right cover with the right cost with your advisor as part of a smart budget.
It is impossible to forecast what the market place will do in the next few years, with so many external factors to our economy. For instance, many would not have predicted Covid or the conflict in Ukraine having such global effect on finances not even 5 years ago. The banks certainly weren’t forecasting rates as they are now as you can see from the rates they offered only 2 years ago around 1%! Being prepared is important but make sure the solution works based upon what you know now and what your household wants to achieve, rather than waiting for the market to adjust as at present, it is too volatile to predict.
Would you advise people to start planning even if their fixed rate isn’t due to expire for a few years?
Within reason, yes. Establish your budget as early as possible and monitor this regularly. If you always ensure that you have a surplus at the end of each month after this, you’re allowing yourself flexibility to cover incidental costs (if the car needs work or the boiler goes for example) and by creating this habit, should your mortgage increase when it is due to reach the end of its term, you have a surplus to absorb it and re-adjust accordingly.
It is too difficult to predict where rates will be in a few years, but it doesn’t hurt to be mindful of it. Will they go up or down is too uncertain but would suggest you would need to really be looking into it at least 6 months before the rate expires with a plan in place at this point. Enjoy your low rate as it is for as long as you can (as long as it fits the needs of your household) then seek advice at that 6 month point.
What support is available for people who can’t afford the repayments?
Going back to the budget is always key. Have you established whats essential and non essential? If you have but still are struggling, speak to a whole of market advisor who will look at all your options. This maybe extending term / consolidating / reducing mortgage balance if you have the means or switching if possible.
If you are really struggling and worry about your mortgage payments and your home, your mortgage lender is always a good point of contact also, as they always seek repossession as a last resort, so they can help you manage your payments in a way that is more affordable and a workable solution.
Be very mindful of getting into debt management plans / bankruptcy / IVA’s as this can wreck your credit profile, meaning you may not be able to obtain a mortgage or if you can, it maybe very expensive, compounding the problem and limiting your options. If you can, try and avoid missing payments on your credit too or entering arrangements with them as this also has a similar effect.
Ultimately, depending where you’re at, talking is key. If you have not had much joy with your advisor, then speak to Citizens advice for free for debt advice if needed.
Any other tips/advice?
Be honest with yourself when establishing your budget and what you want. The famous 7 P’s – Proper Prior Planning Prevents Piddle Poor Performance. As ever, speak to a whole of market advisor and have regular bi-annual check ups, which will typically cost you nothing for a general chat, to keep yourself up to date.
