Limerick financial planner discusses how to prepare should mortgage rates increase

AT the beginning of the year interest rates were expected to remain unchanged but since the war began in Iran all bets are off the table and the mood that rates will stay as they are has now shifted to how many times could rates increase this year.

And if they do and it’s certainly an if, what should mortgage holders do?

And that’s a question people are asking themselves and I say that with confidence because the biggest question that’s arriving in my inbox at the moment is from mortgage holders, and when I say mortgage holder, I’m not just referring to people who have a tracker or variable rate mortgage, I’m also including those who have fixed rates where their rate is due to expire within the next 6 or 12 or 18 months.

And while people on fixed rates may not immediately feel the impact of any interest rate increase, they’re still worried because any new fixed or variable rate offerings when their current fixed rate matures could be higher than what they have been used to paying.

READ MORE: Limerick financial planner explores funds with different risk ratings

And people are already struggling with the cost of living increases and now another potentially higher monthly cost which probably accounts for the highest % of their monthly income could also be going up. So, it’s a worry for people, of course it is.

And in situations like this you can only make a decision at a point in time when the facts are in front of you. You make a decision that’s best for you at a point in time with all the knowledge in front of you with reference to your circumstances, and no one else’s.

So, with that in mind how should we be preparing for an interest rate increase that is being heavily flagged and I think there are a number of things we should be doing and considering.

1. Review your monthly budget

You need to know what your present monthly repayment could increase by and what impact that would have on your monthly cash flow. And you’ll only ever know if you have a reasonable handle on what surplus or deficit you’re currently carrying.

And once you know that you’ll know what you’re up against and you’ll then be able to see if you have enough of a surplus that will allow you to carry a higher repayment, or will it push you into a deficit situation or make an existing deficit an even bigger one.

If for example your mortgage repayment was to increase by €150, you’ll have to find that amount in other areas by spending less or getting better value with fixed expenses to compensate for this increase.

2. Switch to lenders who have a lower rate

This is a solution that is always being bandied about and it’s a good one especially if the rate charged by other lenders is much better than yours.

So, I’d investigate this and I did this with a client of mine recently who had a mortgage in place with his lender for the past 8 years. He was on a variable rate which was 4.7% and his monthly repayment was €1,418.
But in those 8 years, he upgraded his home and had an energy rating of A2 and his house went up in value and now his loan to value was less than 50% which meant he could get a 3 year fixed rate of 3% with another lender where his monthly repayment would become €1,185.

He was getting a rate reduction of 1.7% and saving himself €233 each month. And potential rate increase or not, he should take advantage of this but he just didn’t know and wasn’t watching interest rates and what other providers were offering. And in fairness not many people do until there is a trigger event that makes them sit up and look at their rate and how competitive it is or not for that matter.

And in the end he didn’t have to move lender because his existing one had a three year fixed green rate of 3.35% and he switched to it and saved himself €185 each month in the process and the time and effort it took him to achieve this was minimal.

3. Extend the mortgage term

This is an option especially if a 0.50% increases could tip someone into going into arrears.
It’s not an option I particularly like, because if you are adding more years to your mortgage you end up paying more in interest and it could impact your credit rating as well. So, in the short term it’s okay and for some it might be a case if needs be because they have no other option and don’t want to get into arrears, but in the long term it’s not so good.

4. Start saving to create a buffer

Instead of just paying your current repayment until your fixed rate expires and the same applies to a variable rate for that matter, consider funnelling away extra money now, if you can that is, into a separate dedicated account that you will use to help with those extra repayments should they come about.

And the amount you save may not cover the entire difference over your next fixed rate period but if it covers the difference for a year or two, then that’s better than doing nothing. It at least gives you breathing space to cut back on your spending or increasing your income and a potentially new higher repayment isn’t going to be an immediate shock to you.

And again it’s working out what your new monthly repayment could look like (run the numbers to see what would happen if rates increased by somewhere between 0.25% and 0.75%) when you roll off your current fixed rate and once you know start putting aside that amount now to build up that buffer I just spoke about.

5. Exit current fixed rate now and re-fix

Perhaps locking into a fixed rate now and fast forwarding the re-fixing of your rate before any possible rate increase happens is worth considering.

And normally you’d only ever exit a fixed rate early if you were going to re-fix at a lower rate. But again I encountered an individual recently who came out of a low fixed rate and into a higher fixed rate and when he ran the numbers it made sense for him.

Because even after paying a reasonable small early exit penalty he would see an overall monthly saving of about €92 over the next 5 years. He’d pay more over the next 10 months but less over the following 50. But that’s only if rates increased by 0.5% and don’t change over the next 5 years.

If they increased by more his saving would be higher and if they reduced over that time period he’d end up paying more.
And that’s the unknown, and that’s why you can only apply a decision like this one, to your circumstances and no one else. For some people they can absorb an extra 1% or 2% of an increase and for others 0.25% could be at their limit.

6. Earn more
If interest rates were to increase by 0.75%, a client of mines mortgage repayment will increase by about €320 each month.
And one option to pay this higher amount is if he were to earn more and that extra more each year would be c. €7,400. He’d have to earn that extra amount each year to net down at €320 per month.

And it’s a big ask but at least he could put a number on what this particular solution is . And if he couldn’t earn more, maybe he could consider renting out a room in his property where he could earn €14,000 per year or €1,167 per month tax free.

And admittedly this option of increasing your income isn’t for everyone either and it will depend on their circumstances.

And some of the suggestions I’ve outlined may not apply to your circumstances and there may be others which is why it’s really important you start thinking about this eventuality because it looks like it’s coming our way.

Which is why you need to start thinking about how best to prepare because it will help you avoid getting caught by surprise when your monthly repayment does increase and your panicking about what to do.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie