ESSENTIAL GUIDE TO MONEY: Work out how your mortgage payments could be hit by interest rate rises

Interest rates may leave you cold but mortgage holders need to give them serious consideration, says personal finance writer ED FOSS.

PLENTY is being said at the moment about the potential movement in house prices over the next few months.

It is hardly a surprise, considering speculation about the value of homes is one of the nation’s greatest obsessions.

Whether the value of your home is about to dive, spiral or remain static, if you aren’t about to sell in the short or medium future then, frankly, the single most important figure which is important to you is the level of interest rates set by the Bank of England.

Although the interest rate may or may not directly govern your immediate mortgage repayments depending on what kind of deal you are on, it will obviously have an impact eventually.

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This seems like a simple statement of fact. But it would appear many people are unaware of how a rising interest rate can catch out a mortgage holder who already oversees a hard-pressed domestic budget.

At this stage, I could get back on to my favourite subject of economic education – or lack thereof – and its impact on the real-life decisions we all have to make every day.

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But, whatever the reason, too many people, especially those who gained their first mortgage in the last couple of years, have not sat down and worked out how their mortgage payments could be hit by interest rate rises.

And it is an absolutely key question – an interest rate increase is, after all, an issue of when rather than if.

It could be as soon as this week, with the monetary policy committee due to make its regular announcement on Thursday as to whether it will up the rates.

Even if Thursday does not produce an increase, the record 21-month low of 0.5 per cent will eventually come to an end.

So where do you stand in terms of your mortgage repayments?

If you don’t already know, it would be a useful question to answer. Ask around among the older generation and many will have horror stories to tell of rising mortgage payments from years gone by.

According to one commentator this week, the ongoing low mortgage rates of recent times have created an ‘interest rate-spoiled’ generation.

It appears, says the research, that the lengthy period of low interest rates has resulted in homeowners losing touch with mortgage reality, as best buys for three-year fixed rate deals are currently about 5.1 per cent, which is nearly 2 per cent more than the average homeowner is currently willing to pay.

Karen Barrett, chief executive of Unbiased, said: “Homeowners’ ideas of what is a reasonable fixed-rate mortgage have become distorted in the low-interest rate environment and they need to ensure that their mortgage expectations are realistic.”

This isn’t just about best deals, it’s also about not being caught out by rising rates increasing your mortgage significantly. If that were to happen, would you be able to pay?

Get the calculator out and work out the facts or seek advice from a professional.

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