Could You Afford Your Mortgage If Interest Rates Doubled?

Stress testing isn’t just for banks Mortgage rates can go up as well as down, and home owners need to be prepared for this. High interest rates are good news for those looking at savings. They are bad news for borrowers. The skill of money management is creating a financial plan which ensures that your personal money will realise its’ best potential in either case.

Mortgage Rates Can And Do Rise

Over recent years interest rates have been held at low levels, but this has not always been the case. Interest rates started rising around the mid-1950s. They rose dramatically around the early-1970s. In the mid-1980s they dipped noticeably but then climbed again to the early-1990s.

Since the mid-1990s, overall, interest rates have been on a downward trend to today’s record lows – please see the attached chart. Nobody knows for sure how long they can stay that way. Therefore it makes sense to think now about how to cope with a future rise in interest rates.

Make Sure You Can Cope With Rate Rises Before You Commit

Mortgages may come in varying lengths, but they are all long-term commitments.

New rules are intended to make sure that prospective buyers only take out mortgages they can afford over an extended period. These rules came into force on 26th April 2014. In short, the goal of these rules is to oblige lenders to move away from formulas and to look at buyers as individuals.

Traditionally loan amounts have been decided primarily on multiples of income. According to the new rules, lenders will have to analyse an individual borrower’s overall situation. This will include any other borrowing. It will also include day-to-day expenses. Lenders are now expected to be very thorough in checking the accuracy of applications.

Previously mortgage applicants could self-certify in certain cases. Unfortunately, this lead to self-certification mortgages being known as “liars’ loans. With this in mind, lenders now look for supporting paperwork, such as bank statements. Failing to provide these and having them checked can increase the length of time required to be accepted.

In terms of the actual application, buyers should ensure that they are on the electoral role and that their credit record is accurate. Both of these are sure to be checked by lenders. Buyers should also do everything possible to show a stable history of financial responsibility.

This means ideally maintaining a solid track record of employment and also of paying debts appropriately.

Be Prepared To Be A Good Borrower

It’s often a good idea to get advice before taking any major financial decision. In terms of taking out a mortgage, prospective borrowers will need to look at the overall cost. They will need to be fully confident that they can meet repayments even if interest rates rise. It’s also wise to look at how individual circumstances may change. For example life’s challenges such as redundancy, unemployment, accident, illness and death should be planned for. It’s best not to trust to luck with regard to the family home.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

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