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How to budget for higher mortgage rates when you’re a freelancer

Do some necessary preparation before you apply for a new mortgage and consider using a specialist broker that understands contractor and freelancer income fluctuations / Photo by ANTONI SHKRABA
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How will interest rate rises impact my monthly mortgage payments? This is what all home-owning or soon-to-be homeowners should be asking themselves, especially if they have fluctuating incomes.

Higher interest rates will start to feed through to mortgage interest rates in a matter of weeks if lenders decide to follow the Bank of England’s lead. By some estimates we could see Bank of England’s interest rates rise twice by the end of the year. This is in an effort to keep inflation down and curb consumers spending more than they can afford.

The thing is, some freelancers could be worse off than others depending on the size of their outstanding mortgage and whether they are on a fixed or flexible rate.

Who will be most impacted by mortgage rate rises?

The proportion of freelancers spending more than a fifth of their after-tax income on mortgage repayments could get close to the levels last seen in 2007–08. A lot of the increase will come from those higher up in the income distribution, as they are more likely to have a mortgage in the first place, according to the Institute of Fiscal Studies.

Although the IFS says a smaller proportion of low-income people have a mortgage, the impact of rate rises on them might be of relatively greater concern.

“Not only will wider inflationary pressures be putting a greater pressure on their household budgets, but more than two-in-three low-income mortgagors could end up paying more than a fifth of their income on mortgage repayments, if mortgage interest rates rise by 2.50ppts,” says the IFS.

“In addition, lower-income mortgagors, along with older people, are also more likely to be on a variable rate mortgage and so more likely to face such an increase coming sooner,” according to an IFS report.

How to prepare for a mortgage rate hike

If you are an existing home owner with a mortgage, remember that it is likely that the value of your home has since gone up since you applied for a mortgage. The loan to value could then mean a much lower monthly payment for you. To get an idea of how much your property may be worth, do an initial search on Zoopla, and also make sure that any refurbishments can also add value, so a new valuation is wise.

Moneyhelper, the government money advice site, has published some budgeting tips in the event of a mortgage rate rise. Once you get some of these items sorted, it might be wise to contact a specialist mortgage broker who has a history of issuing self-employed or contractor mortgages. High Street banks do not understand freelancer income or use the same criteria as specialist mortgage brokers do, so unless you have a very small mortgage and have a good chance of getting an attractive rate, the High Street route may not be for you.

Kensington/Barclays

Contractors | Accord Mortgages

1. Find out what mortgage you’re on and when it expires

How you’ll be affected by an interest rate rise depends on what mortgage you’re on and when your deal comes to an end. If you don’t know, check your paperwork or with your mortgage provider to find out. Read our guide for more help understanding the different types of mortgages

2. Work out how an interest rate rise will affect you

Now you know what mortgage you’re on, you’re in a better position to find out how this will affect your finances and when you’re likely to see this change. Use the MoneySavingExpert Calculator to work out the impact.

3. Work out what you can afford

If your mortgage repayments are likely to go up, work out if you can afford the increase. Create a budget and see if there are any areas you might be able to cut back. If the increases are likely to be in the future, then start building up a savings buffer so you’ll be able to afford your mortgage when they hit.

4. Speak to a debt adviser before you get into financial difficulty

You don’t have to be in debt to seek help. A debt adviser can help you budget and assess your income/expenditure early before you get into any financial difficulty. Use our debt advice locator tool to find free debt advice.

5. Build up your credit score

It might seem like a strange time to be focusing on this, but by working to improve your credit score, you will be able to get a better deal when your deal comes to an end or you remortgage.

6. Make sure you’re on the best deal

If your current deal is coming to an end you should definitely be looking at switching to make sure you’re on the best rate. But it can also be worth looking if you’ve got some time left on your current deal. You might have to pay some fees, but if the savings are worth it you should still switch. For more information on comparing mortgage deals read our page on reviewing your mortgage regularly

7. Overpay your mortgage

It might be a little while before an interest rate rise hits you in the pocket, so take advantage of the low rate you’re currently enjoying and pay extra. There are limits on how much you can overpay and there might also be charges, so you should check with your mortgage provider first. Read our page on paying off your mortgage early

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