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If the cost of living is linked to interest rates, what does that mean for mortgages? – Mortgage Scout

by: Sarah Thompson, managing director of Mortgage Scout
  • 25/03/2022
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If the cost of living is linked to interest rates, what does that mean for mortgages? – Mortgage Scout
Over the last few weeks the cost of living crisis has hit headlines, and become the centre of many debates.


This is the result of many different causes but importantly for our industry, its knock-on effect for interest rates has a direct impact on mortgages. With interest rates set to soar, how can homeowners be best prepared for what is to come? What does it mean for first-time buyers?


Interest rate fears in the mortgage market

Brexit, a hefty Covid bill and inflation are just a few factors causing the price of everything to go up. So, it is understandable that there’s fear among homeowners, as it will sit alongside a rise to the cost of food, fuel, travel, and just about anything else. Is it justified? In my opinion, no.

We will see a period of adjustment where homeowners will need to look carefully at their spending and factor in how much a rise in their mortgage will affect them. But it is important to note that these worries are also dependent on what type of mortgage your client has.


Variable vs fixed rate mortgages

If your client is on a fixed rate mortgage, there’s little reason for them to worry as the rise in interest rates won’t affect how much they’ll repay. This only becomes a factor when they remortgage or look for a new one as it may affect how much they can borrow. Brokers can help to reassure their clients by emphasising this.

There’s understandably more concern for those on variable rate mortgages who will see a rise in line with interest rates. However, you can assure your clients that these scenarios will have been stress tested by you previously and the mortgage is already based on how an interest rate rise will affect someone’s ability to repay.

Let’s not forget that those on a variable rate have enjoyed low interest levels for some time and will know the pros and cons of their choice, particularly as a big benefit is there being no early redemption fees if they want to get out of their mortgage early.


First-time buyers

Those remortgaging or looking for new mortgages might not be able to borrow as much as they could previously – this will be the same for first-time buyers.

However, it isn’t all doom and gloom for first-time buyers. Findings from the latest English Housing Survey showed that 70 per cent of first-time buyers are doing so with their own savings, in comparison to the 30 per cent that get help from their parents.


What should homeowners do about their mortgage?

Homeowners shouldn’t worry about an interest rate that is out of their control either.

It will rise, but it isn’t and won’t come close to the historic rises of decades ago. A reassessment of outgoings, particularly with the cost of everything else rising will be a good safety measure in the face of such insecurity.

If any homeowners get in touch with you with concerns, I’d advise talking them through these worries, instead of letting them go it alone.

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