How to Cope when the Interest Rate on your Mortgage Loan Increases

A recent study commissioned by the Federal Reserve revealed that a large percentage of people have little knowledge about how their mortgages work. Many do not understand the basic concept that an increase in interest rates can affect their monthly mortgage payment and cause it to rise. Whilst all good financial advice would suggest that people make advance preparation to deal with interest rate raises, this means nothing if people fail to understand how an increase can affect their monthly payments. 

One common reason the interest rate rises is when a fixed rate which you were tied into comes to an end and the mortgage reverts to the standard APR. This can equate to a huge rise in the monthly payments if the fixed rate has cushioned you against interest rate rises, but there is time to prepare for the increase and save and budget accordingly. Often those coming off a fixed rate face redemption penalties so have to bite the bullet and stay with the mortgage loan until the penalty period expires, other wise the initial benefits of the fixed rate are negated.

The only thing you can do is meet the new payments and be prepared to remortgage when the penalty phase ends. It is imperative in this period that all payments are met on time as you will not be offered a lower rate by remortgaging if you have slipped into arrears. Also the best remortgage rates will only be available to those with high equity in the property and good credit scores.

The second major cause of interest rate increases is faced by those with variable rate mortgages which follow the bank rate. If rates rise so much that the monthly payment becomes hard to meet then borrowers have the option of remortgaging onto a lower fixed rate. It is even worth asking the current lender if they have a more suitable mortgage product for you, advising that otherwise you may be forced to switch lenders.

Borrowers need to be aware that the benefits of remortgaging to a lower rate can be nullified by the high cost of arrangement fees to do so, plus the exit fee which will be charged by the current mortgage provider. Remortgaging is most suitable for those who have built up equity in the property and can really make a saving by arranging to move to a lower fixed rate.

If remortgaging or switching to another product with the same lender is out of the question then all you can do is cut back and make mortgage payments a priority.  If you do face financial difficulties due to the increase contact your mortgage lender to discuss it with them. They will be far more willing to assist you if you address the problem straight on.

One option which borrowers far too often overlook is facing the fact that the mortgage payment is just crippling their budget and is unmanageable. Those who realise this early would benefit from selling the property themselves rather than waiting for the bank to foreclose.