Will your mortgage be affected by a rate rise?

There is one very important thing that all mortgage hunters want to know: what will happen to my chosen mortgage if interest rates rise?  Here is a quick guide to understanding what happens with some of the most popular mortgage types when interest rates rise.

Fixed rate mortgage
The major benefit of a fixed rate mortgage is that your interest rate is fixed, and will not rise even if interest rates rise elsewhere during your mortgage term. However, it is important to keep in mind that your lender’s standard variable rate will rise if the Bank of England raises the base rate.  This can impact your finances in the long term, as your repayments can rise substantially when you come to the end of your fixed rate period, particularly if there is a large discrepancy between interest rates now and when you took out your mortgage.  Avoid this downside by remortgaging for a new fixed rate period with a new lender. 

Variable rate mortgage
If you choose a variable rate mortgage and there is an increase in the Bank of England base rate, your lender will adjust their interest rates accordingly within a few days.  This means that your monthly repayments will rise.  This is the biggest drawback to variable rate mortgages; however, there are many benefits that can negate the prospect of possible rate rises.  Don’t forget that your repayments will also fall if there is a drop in the interest rate during your mortgage term, which may leave you financially better off in the long run.  You can also find variable rate mortgages that come with discounts, so that the impact of an interest rate rise will be less than on a standard variable rate mortgage.

Tracker mortgage
If you choose a tracker mortgage, your interest rate will increase when the Bank of England raises the base rate.  Your monthly repayments will rise as a result.  While this is the major downside to a tracker mortgage, don’t forget that when the Bank of England lowers the base rate, your monthly repayments will fall.  This makes tracker mortgages an option worth considering if you have a flexible income that can withstand repayment fluctuations. 

Capped rate mortgage
If you opt for a capped rate mortgage and there is an interest rate rise, whether or not your mortgage will be affected will depend on the cap.  If the rate rise raises interest rates to above the cap, your interest rate will only rise to your cap and no further.  This is the most attractive aspect of capped rate mortgages, particularly during times of high and fluctuating interest rates.  Protection against sky-high interest rates makes a capped rate mortgage a good option if you know that your finances can only stretch to a certain point, and you also want to be able to take advantage of interest rate drops during your mortgage term.

Discount rate mortgage
As in the case with a regular variable rate mortgage, with a discount rate mortgage your interest rate will rise if your lender increases their interest rates during your mortgage term.  The major difference (and benefit) is that the impact on your finances will be less, as you will be borrowing money at a lower interest rate in the first place. 

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