How would an interest rate rise affect my mortgage?

If and when interest rates go start to go up, do you know what impact it would have on your mortgage?

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The bank of England base rate - which we’ll just call interest rates - has been down at 0.5% since March 2009, but it won’t stay like this forever.

There’s one thing we CAN be sure of though: if you have got a mortgage, sooner or later a rise in interest rates will have an impact on your pocket. Exactly how it will, however, will depend on the type of mortgage you’ve got.

Fixed rate mortgage

The rates you pay on a fixed rate mortgage won’t change within your agreed term, but when your term ends the rates you pay will revert to the lenders SVR (Standard Variable Rate). 

Lenders can re-price their SVR’s whenever they choose, but they’ll almost certainly raise them when interest rates go up.

Discount mortgages

Discount mortgages provide a certain discount off your lender's SVR for a given period - this means when the SVR rises, your mortgage will rise too.

Tracker

As it says on the tin, base rate tracker mortgages rise and fall in line with interest rates. So, if interest rates go up by 0.25% your mortgage rate will also rise by 0.25% and the same applies for any other rise. Increases will kick in immediately, so be prepared.

Capped

A capped rate mortgage literally places a cap or limit on the rate you will pay, so while your rate could go up with in interest rate rises, you know it can’t get any more expensive than the cap you have signed up to, over the given term.

So with all this in mind, what can you do about it?

Here are three actions you can take right now

First off, know where you stand. Using MoneySuperMarket’s mortgage calculator will help you understand exactly what various rate rises will mean to your monthly finances.

Secondly, overpay now if you can. Most mortgage lenders, so probably yours allow you to overpay penalty free by 10% a year, so take advantage of this when rates are low. When rates do start to rise you could be really thankful, that you have got a smaller mortgage.

If you’re paying your lender’s SVR or you’re coming to the end of your current mortgage deal - be it fixed, discount, tracker - start looking for a new one now. You can often book your rate up to six months in advance and fixed rate deals are now the cheapest they have ever been.

Interest rate rises are inevitable. Some are predicting that when interest rates do rise it will be in incremental steps of around 0.25%, peaking to around 3% in 2017. But the truth is, no one really knows.

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