How rising living costs could affect your mortgage

How rising living costs could affect your mortgage
Steeper living costs and higher National Insurance contributions may affect the amount you can borrow, with both taking a bigger chunk out of monthly incomes.

April has seen a sharp increase in the energy price cap, as well as a 1.25 percentage point rise in National Insurance. Food costs are also going up, and most households are having to pay more in Council Tax too.

Lenders base their affordability calculations on how much you have coming in each month, and on your outgoings, with some already tightening up their lending criteria to take account of higher household bills.

Santander for example, has indicated that it will take into account higher National Insurance, increased outgoings and dividend income tax rates when assessing affordability. It has also raised its stress rates on certain mortgages.

Stress rates are essentially rates that lenders apply in the background during the mortgage application process to check that you’d still be able to afford to pay your mortgage should interest rates go up. As rates have risen this will mean lenders will need to nudge their stress rates up as well.

Still time to take advantage of low mortgage rates

Despite rising costs eating into our disposable incomes, it’s not all doom and gloom, and there are still plenty of competitive mortgage deals to choose from.

However, mortgage rates have risen in recent months in response to Bank of England base rate increases. With base rate expected to keep rising, it may be a good time to consider locking into a fixed rate, especially if you are on a variable mortgage.

Many borrowers are currently on tracker mortgages, which track the Bank of England plus a set percentage. When interest rates are falling, those on tracker mortgages are first to feel the benefit, but when rates are rising, as they are now, they will see their payments rise.

If you’re on a tracker mortgage and won’t face hefty redemption charges to move away from your current deal, you may therefore want to think about locking into a fixed mortgage to protect yourself from higher payments in months to come.

This also applies to those on other types of variable rate mortgage, who are also likely to see their mortgage costs rise if the Bank of England continues to raise rates. If you’re on your lender’s standard variable rate, you may be able to significantly reduce your monthly mortgage costs by remortgaging , so it’s well worth exploring the various options that may be available to you. Those savings could help make a dent in the other cost increases such as energy which have become harder to control.

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