If you have a lot of credit card debt or large loans, your mortgage probably isn’t top of your list of debts to worry about. But two pieces of news are warnings that today’s ultra-low mortgage rates won’t continue forever and that you need to take account of this.
Treasury Select Committee inquiry into 2014 Budget
As part of its inquiry into the budget. MPs on the Treasury Select Committee heard evidence yesterday from various economists. Several mentioned the abnormally low level of Base Rate at present, as the following graph shows:
Paul Mortimer-Lee, Global Head of Market Economics at BNP-Paribas told the committee: “People are making decisions currently on the basis of interest rates that are extraordinarily low by historic comparison. It worries me that this won’t last, and that when we move back to normal times, there will be an adverse shock to households as the debt built up at low interest rates has to be serviced at a much higher interest rate.”
New rules about mortgage lending
On April 26, all mortgage lenders will have to implement new rules. These are likely to mean a move away from income multiples as the main basis for assessing how large a loan will be offered. Instead there will be a detailed investigation about spending commitments and whether the mortgage will be affordable not just at current interest rates but when they rise. Paul Smee, director general of the Council of Mortgage Lenders, said the new rules are “the largest change to how the mortgage market works for a decade.”
For some people this could mean that larger mortgages are offered, but anyone with a significant amount of unsecured debt may find it harder to remortgage when their current interest rate fix ends.
The implications for people with debts
It seems likely that interest rates will remain unchanged for at least another year, but at some point they are going to rise. Check how much a 1, 2 or 3% increase would mean to your mortgage – there is a calculator here to do that.
It would be sensible to view this period of low mortgage rates as an opportunity – possibly a once-in-a-lifetime chance – to clear your unsecured debt as fast as possible. There have been a lot of good 0% balance transfers around recently. Grab one if you can, but your aim should then be to clear the debt, not reshuffle it at the end of the 0% period.
If you think you will be really struggling when mortgage rates go up you should have a look at what you could do to change things. This normally comes down to some combination of increasing your income and reducing your expenditure; there are lots of ideas here.
All this may seem unnecessary if you are managing fine at the moment, but taking action now will put you in a better position when the Bank of England increases interest rates.