Most homeowners coming off their fixed rate mortgages will have to pay more on their mortgages this year and quite possibly next year as well. The Bank of England has hiked interest rates from close to zero percent in 2020 to 5.25 percent in 2023 (as on 28th November 2023). The central bank’s target inflation is 2%. The CPI inflation in October was 4.7% (source: Office of National Statistics), which is significantly higher than the target inflation rate. The Bank of England Governor has warned that interest rates will remain high until we get the target inflation. He also warned that the central bank may be forced to hike interest rate again.
How will your mortgage payments be impacted?
If the fixed term of your mortgage is ending, then you will have to refix your mortgage at much higher returns. If you began or refixed your 3 or 5 years fixed rate mortgage in 2018 – 2020, your mortgage rate would have been in the range of 2 – 2.4% (source: Office of National Statistics). Current 3 or 5 year fixed mortgage rates are being offered at 4.95 – 5.4% (source: Money Super Market, Forbes Advisor, as on 28th November 2023). In other words, your mortgage payments are likely to double or go up even more, when you refix your mortgage. At a time, when cost of living has reached almost crisis levels, this additional burden on higher mortgage payments will put a strain on individuals or families’ personal finances.
How to prepare for higher interest rates?
You should check when your fixed rate mortgage is ending so that you can plan accordingly. You should assess by how much your mortgage payments will increase once you remortgage. This will help you prepare financially for increase in costs. You should work out if you can afford the increased payments. Make a monthly budget of your expenses and see if there are any items that you can cut back. If you have time before you need to refix your mortgage, start building a savings buffer, so that you are able to afford higher mortgage payments when it hits you.
If you have some time before you need to refix your mortgage, you may be able to take advantage of low interest rates you are currently enjoying by overpaying your mortgage and reducing your debt burden. However, there are limits on how much you can overpay and there might also be charges, so you should check with your mortgage provider first. Finally, you should explore if you are on the best deal. If you can get a better rate from another provider, you should explore the option even if you have to pay some fees. If you can reduce your interest burden, it may be worthwhile to consider a switch.
Why you need to have mortgage payments protection?
In a high interest rate environment, loss of income due to accident, sickness or involuntary unemployment can put homeowners at risk with regards to their mortgage payments; if you are unable to make mortgage payments for a prolonged period of time, you could lose your home unless the lender agrees to provide you some relief. Mortgage Payment Protection Insurance can cover your mortgage payments (partially or in full) if you are prevented from earning due to accident, sickness or involuntary unemployment.
Realm Protection Mortgage Protection Insurance
Realm Mortgage Payment Protection Insurance policy pays a monthly benefits to cover mortgage payments if the policy holder is prevented from earning an income due to accident, sickness or involuntary unemployment. We pay up to £ 2,500 per month, for a maximum period of 12 months, if you do not have an income due to accident, sickness or unemployment. Our mortgage payment protection insurance cover is also offered on an own occupation basis. Own, or suited occupation means that the policy holder can claim if they are able to work but are unable to work in their own occupation or role that has a similar salary or skill set.
Should you wait till your new mortgage rate kicks in to buy mortgage payment protection?
You can buy Realm Protection’s Mortgage Payment Protection Insurance policy to cover your current mortgage payments. Our mortgage payment protection policy enables you to cover additional monthly expenses up to 100% of your mortgage payments. So your monthly benefit can be your monthly mortgage repayments plus 100%, subject to a cap of £ 2,500 per month or 65% of your monthly income, whichever is lower. In other words, even if your mortgage payments double after refixing, your Realm Protection Mortgage Payment Protection Insurance policy will enable you to meet your mortgage obligations.
Conclusion
These are difficult economic times and protecting against unforeseen risks is even more important in these times. If you wait for too long to buy income protection or mortgage payment protection insurance, you may be at the risk of not being eligible for a policy in the unfortunate event that you are unable to work due to accident, sickness or unemployment. If you already have an income protection or mortgage protection policy in place you should be very careful when considering the costs and value during these difficult times. It is only when an unfortunate need for you to claim for an accident, sickness or unemployment occurs that its value is really appreciated.
Click on this link, if you want to know more about our mortgage payment protection insurance policy.