If interest rates rise your mortgage payments may go up. If you start to struggle financially as a result an IVA could help.
- The effect of an interest rates rise on your Mortgage
- Options if your Mortgage Payments go up.
- How can an IVA help?
- What if interest Rates rise during your IVA?
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The effect of an Interest Rates rise on your Mortgage
Interest rates in the UK were at a historic lows of 0.5% since March 2009. In August 16 the rate fell again to 0.25%. This has allowed many homeowners to enjoy ultra low mortgage payments.
There is no certainty about when rates will go up again. However it is commonly accepted that the current situation cannot last forever. When they eventually do start to rise so too will the mortgage payments of many home owners.
If rates were to rise just 0.25% this would add £42/month to the cost of a £200,000 mortgage. If rates were to rise by 1% to just 1.25 overall this would add £167 to the monthly cost.
An Interest Rate rise will only directly affect your payments if your mortgage is Standard Variable Rate (SVR) or Tracker. If you have a fixed rate they will remain the same.
Options if your Mortgage Payments go up
If your mortgage payments go up after interest rates rise there are a number of things you can do to cushion the blow. First of all you may need to consider where you can reduce your monthly expenditure in other arears.
Review your living expenses budget to see where you can reduce your outgoings. Very often this together with tighter management of your money can be enough to free up the cash you need to pay your increased mortgage.
If it is impossible to reduce your expenses any further you can also speak to your mortgage lender. Under a set of rules known as the mortgage Pre Action Protocol they are obliged to help you if you are in difficulty .
The mortgage Preaction Protocol requires lenders to offer help such as a payment holiday to overcome short term finacial difficulty. Extending the mortgage term or changing to interest only should be considered for longer term problems.
How can an IVA help if Interest Rates rise?
If you cannot make further savings from your living expenses and your mortgage lender will not help and alternative option is to consider a IVA.
An IVA will allow you to considerably reduce your unsecured debt payments. This include the amount you pay towards debts such as credit cards and personal loans. The money you save can then be used to pay your mortgage.
The Arrangement also provides legal protection for you and your property. As such your unsecured creditors cannot take further action such as trying to secure their debt with a charge.
Mortgage debt itself is secured and as such cannot be included in an IVA. Once the Arrangement starts you must maintain your mortgage payments as normal.
What if Interest Rates rise during your IVA?
It is possible that interest rates will rise during your IVA. This could have serious consequenses if the subsequent increase in your mortgage payments means you can no longer afford the agreed payments.
If you find yourself in this situation you should speak to your IVA company straight away. Depending on your circumstances it might be possible to reduce your payments.
If your payments needs to go down by more than 10% the creditors will need to accept a formal variation of the Arrangement. They are likely to demand that you extend the agreement to compensate.