Rising Interest Rates – Why Cost is NOT the big issue
The biggest problem with rising interest rates is not that it increases the cost of your finance. Let that sink in…
The biggest issue with rising interest rates is not that it will increase the cost of your finance but that it changes the affordability calculation that lenders use.
Let me show you why
If you have a residential, mixed use, or commercial property, and there is a mortgage against that property, when you took out the loan, the lender would have wanted the income from that property to exceed the loan interest cost.
If you borrowed as a limited company, typically that income would needed to be 125 -130% of the loan interest cost. Add into that, the majority of that type of lending is done on a five year fixed rate.
Then, let’s say your current interest rate is say 3%. When that fixed rate expires, your new interest rate goes to 6%. That’s a 100% increase, your interest cost has doubled. The question is, have you also doubled the income from that property?
The chances are you haven’t and therein lies the issue.
Your next fixed rate may not be affordable and the mortgage you have may no longer stack up. Big problem.
The big question is what do you do about it?
When it comes to lending and mortgages there’s a very simple way of looking at things, and that is that time = options. The more time you give yourself the more options you have.
If you have a fixed rate mortgage that is due to expire any time in the next 12-36 months, the chances are your next fixed rate is going to be higher. If you look at the Bank of England reports, they say that interest rates are going to continue to rise over the next 18 months before they plateau off before they start to come down (it’s a prediction, don’t hold me to it).
If we work on this basis, when your fixed rate expires, you are going to be paying more.
This is where you (or we) do the maths. It may be better to break your fixed rate, take a longer new fixed rate and be in a position that when it expires next time it’s at the point when interest rates are projected to have come down.
Don’t leave it until your fixed rate expires, and then look at what your options are. That’s too late. Don’t run the risk of your existing mortgage being unaffordable because that is a problem. Look at it early.
If you have a fixed rate mortgage expiring anytime in the next 2-3 years, you may be best to look at it early.
The biggest issue with interest rates rising isn’t the cost of finance it is your affordability. Happy to explain more, get in touch.
By Dave Farmer