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Mortgage rates are rising
Mortgages are not something that many professionals concern
themselves with. Yet with two rate rises during the last four
months and fears that there could be more on the way, millions
of people face higher housing costs – not to mention
a squeeze for those who have invested in the buy-to-let market
on the back of low interest rates that are (or at least were)
covered by rental income.
On a £200,000 mortgage, the additional cost of these
increases for those using an interest only mortgage will be
£1,000 a year. This may not sound much in the overall
scheme of things, but it is £20 a week (out of taxed
income) that cannot be used for other things, such as investments,
pensions- or paying professional fees! Put another way, a
higher rate taxpayer needs to earn an extra £139 a month
to pay for the Monetary Policy Committee’s interest
rate hikes.
And why? Because the Bank of England has no other weapon
with which to manage the economy. Some economists believe
that the economy can afford to rise faster than the current
target of 2.5% a year, so that using higher interest rates
to slow down consumer demand is not necessarily the right
thing to do. On the other hand, those with long memories know
that high inflation is ultimately damaging to the economy,
especially those sections that cannot easily increase charges
to their customers to cover higher wage bills. Like professional
advisers, for example.
All this is very interesting, but the fact remains that hundreds
of your clients are currently facing increased borrowing costs
and something needs to be done in order to ensure that they
are not paying over the odds.
There are five simple steps that can be taken to protect
clients’ interests:
- Ensure that unsecured borrowing such as credit cards are
kept to a minimum – outstanding balances can sometimes
be integrated into a mortgage (although because these can
involve longer timescales, we are cautious transferring
unsecured debt onto a secured basis and this will need to
be explored in depth for each client);
- Minimise the use of second mortgages – these often
attract higher interest rates because they have only a second
charge on the property;
- Review current mortgage arrangements – would a
fixed rate or capped rate mortgage be more suitable;
- Consider whether savings would be better used to clear
debt, as mortgage and borrowings generally cost more than
can be achieved as interest on savings after tax; and
- Look at the offset mortgage option – for the more
financially sophisticated borrower, these offer the potential
to repay capital faster (and thus at lower overall cost)
than traditional borrowings.
Offset mortgages not only allow the amount of savings in
an associated account to be deducted from the value of the
mortgage each month before interest due is calculated, but
also give immediate credit for overpayments. And since the
amount due each month is based on the original mortgage, overpayments
resulting from the difference between the interest actually
due and the “notional” amount go immediately to
reduce the outstanding balance. This means that the mortgage
is paid off earlier and the overall cost is therefore reduced.
No interest is earned on savings, but since that would be
taxable anyway, there is little disadvantage, when viewed
in the light of overall savings.
Where can my clients go for help?
If you would like us to review any of your clients’
mortgage arrangements, please contact
us. |
