How Do You Prepare for A Rising Interest Rate and Avoid high Repayments?

How Do You Prepare for A Rising Interest Rate and Avoid high Repayments

The Bank of England reports that prices in the UK have been high throughout 2021, and they are expected to reach 7% by spring 2022. Yet, central banks want to keep the situation under control by targeting 2% inflation.

But even though the inflation rate may slow down, the prices of goods and commodities are expected to remain high and thus, making it hard to secure funds needed for people on benefits or for those who need a loan today from a direct lender.

But the question is- Why is inflation rising unstoppably in the UK?

What is the primary reason for inflation in the UK?

There are multiple reasons apart from the pandemic that resulted in inflation in the UK in 2021. After lifting-up up COVID restrictions, individuals headed for impulsive shopping. But in this scenario as well, some business owners find it hard to sell a thing or two. And this led to increases in prices, particularly for imported goods.

Nearly 1/3rd of goods are imported into the UK, as per the studies by Economic Help. Moreover, in a pandemic, the demand increased, and imported products became unusually expensive.

Here are some more reasons for an inflation in the UK:

  • Rising global price of energy
  • Higher shipping costs
  • Staff shortages led to extended working hours and thus demanded increased wages

What could affect the cost of living in the UK in 2022?

The UK household will be affected by inflation in the following ways:

  • Increased broadband prices
  • Average electricity bills will rise by 643% in April 2022, according to bbc.com
  • Rising interest rates will lead to high mortgage payments
  • Rise interest rates will lead to expensive loans offerings
  • Increased credit card payments
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Note: Interest rates increased by 0.5% in February 2022 in the UK, according to the reports from the bank of England.

How To Prepare for Rising Interest Rates in the UK?

Here is how to prepare for inflation:

1)      Time to increase savings

Well, now is the time for UK individuals to prioritize savings. It is some relief for the UK natives. With the increase in interest rates, one could receive incredible interest rates on a savings account. Your savings will eventually increase. You could lock in 2% interest on your savings.

However, it entirely depends on the type of savings account you have. The fixed-rate savings account will keep a standard interest rate throughout the year, and thus, the change in base rate will hardly affect your savings.

Thus, limit your expenditures, especially on big items, and save even small bucks.

2)      Switch to a fixed-rate mortgage

Mortgages will become more expensive with an increase in interest rates. Therefore, if you are on a variable mortgage, the rate could increase drastically, and it could affect your monthly savings or budget.

On the reverse side, if you are on a fixed-rate mortgage, it would not affect your finances much until the validity. While if you are thinking about switching your variable mortgage rates to a fixed rate, you may find it costly. Switching to a fixed mortgage rate is expensive, especially in inflation.

However, it is a costly but far better alternative to variable mortgage rates. You may eventually lock in a lower interest rate in a fixed-rate mortgage.

How to manage an increased mortgage rate?

Here is how to manage an increased interest rate on a mortgage:

  • Analyze how the increased interest rate will affect your mortgage
  • Check on areas you can cut back expenses on and save extra
  • Starts building, saving buffer
  • Contact a financial advisor to plan savings and budget ahead of increased interest
  • Improve your credit score to fetch a better deal on re-mortgage
  • Take advantage of the current low-interest rate to overpay for a mortgage
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3)      Cancel the credit cards

Credit cards’ monthly payments are indeed a liability, and it becomes further impossible to make repayments at a high-interest rate. Therefore, it is ideal to pay off your dues within 60 days for combating this situation. Any interest charge would be low as compared to the new inflation situation.

It would be ideal to cancel credit cards and avoid taking new ones. Instead, you can look forward to other cheap alternatives like 0% credit cards or a balance transfer credit card.

4)      Good time to consider re-mortgaging

If you seek to achieve or switch to a better mortgage plan, now is the time to do so. However, it might not be suitable for everyone.

If you have a small mortgage, it might not be worth considering re-mortgaging. But if you are on a standard variable rate (SVR) mortgage, you can remortgage on a fixed rate with your existing lender.

Don’t consider remortgaging if there is a decline in the price of the property. It can further affect or make the re-mortgaging costly in the inflation and high-interest rate period.

The worst-case scenario is negative equity (the value of your house is less than the amount you owe on your mortgage). If you own a property with less than 10% equity and a poor credit score, it is advisable not to remortgage and focus on building your credit rating instead.

However, if you still want to go for re-mortgaging, consider the below factors:

  • Grab a fixed-rate mortgage deal quickly
  • Watch out for early repayment charges and pay the fee in advance
  • Re-mortgage to a lower interest rate by calculating the monthly repayments and other charges
  • Consider and analyze the additional clause for loan guarantor for a non-homeowner    
  • Don’t stick by one, shop around for the best deals in the market
  • Consult a mortgage advisor to take an informed decision
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5)      Buy Annuities

A rise in interest rates could be good news if you want to buy annuities. Annuities pay income for a lifetime. It allows you to lock in your income on the annuity purchase day itself.

So, investing in annuities at increased interest rates could mean more money in your account. It could fetch you better rates on return. People who already own annuities can’t switch but can profit from moving that money to a savings account.

Thus, this is how you can prepare for increased interest rates and ensure control over your finances smartly.

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