IFAs warn mortgage holders not to panic over rate hikes

IFAs have urged homeowners not to make any rash decisions in reaction to the increase in mortgage rates announced this week.

Around one million homeowners were hit by a hike in repayments on 1 May, some by as much as £40 a month, with customers of Halifax, RBS, Natwest and the Co-op among those affected.

This followed interest rises the week before from other lenders, with one, Manchester Building Society, announcing that repayment rates for some of its customers on tracker deals would quadruple.

This has left homeowners in an uncertain position and many are thinking about how to mitigate the impact of any further increases. However Kerry Nelson, director of Nexus IFA, has warned against liquidating any investments to pay off some of the mortgage early.

"I would scream loudly from the rooftops against doing this, it doesn’t help anyone at all," she said.

"You would lose control and the flexibility of capital when what you want at the minute is for it to work for you as hard as it can."

"If you paid off a lump sum, even as much as five grand, the difference to your mortgage repayments would be absolutely negligible."

"Don’t forget, even for the people that have maybe just got on to the housing ladder, we are going to be in this low-rate environment for a few years yet. In the past interest rates have gone as high as 16 per cent, so if you think about it, it could be a lot worse."

Philip Haden, director at McCarthy Taylor, agrees with Nelson that "the cash is better off in your pocket than the lender’s", and says that it makes no sense to pay the money back with rates as low as they are.

"You need to compare your mortgage rate to what you can get from savings accounts. With most variable rates around 2.5 per cent, maybe look if you can get 4 per cent in a cash ISA," he commented.

Research from consumer organisation Which? suggests that 70 per cent of mortgage holders are concerned about an increase in interest rates, while 14 per cent are already struggling with repayments. Nelson advises people facing such difficulties to try to change the terms of the loan before taking any other action.

"I am not in any way an advocate of interest-only mortgages, but with some providers you can increase the repayment period up to 30 or 35 years, especially for younger people who have just made it onto the housing ladder," she said.

"That’s what the Americans do – they have longer terms and set interest rates, which is what we need – more longer-term and lower-volatility products."

Not all IFAs think overpaying on a mortgage is such a bad idea, however: Chris Spear, managing director of Spear Financial, believes it makes sense for anyone who is financially comfortable.

"We recommend to all our clients to have three months of expenditure in an account they can access if they are in trouble," he explained.

"Aside from that though, nine times out of 10 I would recommend reducing any debt first, whether that be a credit card of mortgage. The low rates have muddied the waters and you can get better rates of return from a savings account, but I agree with the FSA on this one. Paying off debt takes away a lot of uncertainty and makes you feel better."

"The other way is to slightly overpay your mortgage every month. If you go to whatmortgage.co.uk, they have a calculator that shows how much your total debt will decrease if you overpay."