Interest rates have been stuck at record lows for the past six years with the Bank of England’s rate-setting Monetary Policy Committee keeping the base rate at 0.5% since 2009. However, on ‘Super Thursday’ back in August, Governor Mark Carney indicated that interest rates were likely to increase by the turn of the year. So, how does this impact upon your self-build or renovation mortgage and how can you prepare if there is a rate increase?
First and foremost, don’t panic! At this moment in time there is no guarantee that interest rates will actually rise, although you do need to be prepared and not ignore the Governor’s hints. Essentially, you should never be complacent when it comes to your financial obligations and you should always consider the implications a potential interest rate rise will have on your personal circumstances.
We all know that when it comes to buying an existing ‘bricks and mortar’ property, there is a plethora of choice from high-street mortgage providers, whether it’s a fixed, variable or repayment ‘capital and interest’ mortgage, in their various guises.
With a self-build/renovation mortgage you still have the opportunity to choose the most suitable lender for your project but the majority of schemes offered are interest-only variable-rate. This is because lenders recognise that capital is required throughout the build process – at the outset to purchase land or a custom build plot, to purchase build systems and materials and that the majority of self-builders remain living in their existing homes and require ongoing funds to meet living expenditures.
However, due to the very nature of self-build/renovation projects being ‘work in progress’ with no secured end-value apportioned, the interest rates applied to these specialist mortgages are higher than some high street rates available on completed properties. Depending on your funding requirements and whether you choose a traditional, arrears or BuildStore’s exclusive advance-stage ‘Accelerator’ payment scheme, you can be looking at interest rates ranging from 4.99% to 6.19% – although it must be noted that the higher rates apply to those who are looking for the uppermost borrowing of 85% on both land and build costs.
Since the financial crisis, there have been significant changes in mortgage application procedures and this applies to both traditional and self-build/renovation mortgages. The first is the shift from old-fashioned salary multiple lending to affordability calculations. This means that you will be required to be honest with your outgoings alongside your income. Expect to provide documentary evidence on habitual spending on things like feeding the family, childcare, car loan, energy bills, mobile phone or gym contract. Not only will the mortgage lender look at the gap between what you have to spend each month and what you have coming in, they will also take a stab at working out what will happen to you in the future – such as job security and family dynamics – and stress test for theoretical interest rate rises.
Although the second requirement is that all mortgage sales must now be advised, it is something that BuildStore advisers have been doing for many years due to the specialist nature of self-build/renovation mortgages and the company's desire to find the most suitable scheme for customers from their comprehensive portfolio of lending providers.
At the time of going to print, the Bank of England Base Rate is 0.5%. According to Howard Archer, an economist at HIS Global Insight, should earnings growth pick up markedly over the coming months, it would increase the likelihood that the Bank of England will raise interest rates early 2016. It is believed that the Bank of England will most likely hike the rate to 0.75% in February 2016, and it is predicted that it will only rise gradually to 1.25% by the end of 2016, 2.0% by the end of 2017 and 2.5% by the end of 2018.
How to prepare
Thankfully, with only a projected gradual rise in interest rates, the impact upon your build project and repayments should be minimal and affordable. This is because, at the time of your initial financial consultation, your affordability will be accurately assessed and any scheme offered will accommodate any future scenarios. However, it is paramount that you consult with your specialist financial adviser throughout your project and notify them of any change in circumstances that could affect your mortgage repayments as soon as possible.
Also bear in mind that because you are only paying the interest on your self-build mortgage, you will be making cheaper monthly payments on your loan. This gives you an opportunity to build up funds through savings plans that can assist to support any interest rate increase and help to pay off the mortgage debt.
Whether you are self-building or taking on a renovation project, you will naturally be keeping a close eye on your budget and getting the best possible price for contractors and build materials. Of course, there is no harm in forward planning, so even if you are not ready, it may be prudent to think about purchasing fixtures and fittings and taking advantage of seasonal sales, even if you are just at the stage of putting up walls!