Don't wait for rates to rise before you take action, says CML
Published: 2 October 2014
Responding to today's message to consumers from the Money Advice Service (MAS) to plan ahead for future rises in interest rates, the Council of Mortgage Lenders suggests some practical steps that consumers can take now to help prepare for future rises in interest rates.
While the MAS research suggests that many people have not yet taken steps to plan for higher interest rates, CML research also shows that, for most people, gradual increases in rates are likely to be manageable (even if not welcome). And if people take some sensible, practical steps now, most will be able to cope with what the Bank of England has previously flagged as a likely "baby steps" trajectory of rate rises, whenever they finally come.
The MAS research suggests that around half of survey respondents would find it difficult to cover up to £150 extra a month. But the CML points out that £150 equates to around a two full percentage point increase on an average mortgage - something that markets see as unlikely until 2018, and a level of rate rise which commentators would expect to see accompanied by a parallel growth in earnings. In the short term, a quarter point rise would add something around £16 a month to an average mortgage.
The CML has produced a set of ready reckoners showing the broad effect of rate rises on mortgages of various sizes and remaining term lengths - available here.
But the CML shares MAS concern about whether consumers are taking all the steps that they could to plan ahead for higher rates, and ensure that they are resilient to potentially higher payments on their credit obligations.
As a checklist, the CML suggests that it makes sense for all mortgage holders to:
- Remind yourself of what rate you are currently paying, whether it is fixed or variable, and when the deal and any associated early repayment charges expire.
- Use the MAS mortgage calculator to work out what rate rises of different sizes would mean for you, and make sure you could cover this additional amount.
- Having done this, if you think you would struggle, go through a budgeting exercise and consider whether there are any areas of spending you could reduce. There is an extremely practical self-help budget planner on the National Debtline website.
CML head of external affairs Sue Anderson says:
"Although we don't know when rates will rise, the monetary authorities have previously flagged that rises will be finely calibrated, so large sudden shocks are unlikely. By planning ahead now, mortgage holders can get a clear picture of what a rate rise would mean for their own repayments.
"Taking steps in advance to work out what the effect on your payments might be, and planning ahead, will mean that most borrowers will be able to cope by careful budgeting. On an average mortgage of around £120,000, a quarter point rise would typically add around £16 to the monthly payment."
Notes to editors
1. The Council of Mortgage Lenders' members are banks, building societies and other lenders who together undertake around 95% of all residential mortgage lending in the UK. There are 11.1 million mortgages in the UK, with loans worth over £1.2 trillion.
2. The Money Advice Service has numerous useful tools on their website that may assist consumers in regards to mortgage payments, including a monthly mortgage payment calculator and a budget planner. For full details of information they provide visit: www.moneyadviceservice.org.uk