Interest rates are rising. We all know that. If we aren’t already, all of us are going to be paying far more on mortgage repayments than we have for a very long time.

As this is one of the most common questions we get asked and the answer is not as simple as perhaps it should be, I felt it was worth unpacking here in a more long-form way.

Let’s start by looking at interest rates since the mid 1970s.

Bank of England base rates since 1975

I’m using this timeframe because the 1970s and 80s were the last time that we had inflation as high as it currently is. So, there is an argument that interest rates are still very low.

But remember that people don’t get the Bank of England rate when taking out mortgages. We get some derivation of, either fixed for a while, or linked to the movement of, the underlying rate.

The chart below shows the average standard variable rate (SVR) in the UK over the last 20+ years.

SVR in the UK over the last 20+ years

Interestingly, even during the recent 0% base rate environment, standard variable rates didn’t get much below 4%. However, the majority of mortgage holders have deals at lower fixed or variable rates and don’t have to pay these higher SVRs. The problem is though that these deals are rolling off now and will continue to do so over the next few years. At this point, a large number of mortgage holders will find themselves re-mortgaging at much higher rates.

Whilst paying higher interest rates is not much fun, should this change your overall economic plan? It depends on your priorities.

For some people, their principal financial goal is to own their own house, and they focus almost religiously on paying down the mortgage. That’s fine and a reasonable strategy if it gives you the most comfort. Others view their mortgage more as part of their overall plan and are happy to have the debt as it allows them a larger house and they feel they can make higher returns on the funds elsewhere. Both are personal choices so have specific utility value for the individual making the decision.

Here are a few examples and scenarios of ways you can think about it. These scenarios are not based on any specific clients, but are more generalist in nature to give you an idea of a few ways to think about mortgage repayments.

Scenario 1 – Large mortgage, mortgage deal expiring in a few years

This scenario sees a client who has relatively recently upsized their family home and taken on a large mortgage to go along with it. They are still on a relatively attractive deal at the moment, though that will end in two to three years. These clients have other assets, investments, pensions, etc. and are on track for their financial goals.

Potential advice: De-risking

As this client is on track and sees no reason why income should fall anytime soon, a way to think about mortgage repayments would be to look across their financial situation and ask “What is the biggest risk they face and how can we reduce this?” Given the high mortgage level, even though it’s currently on a good deal, that presents itself as the biggest risk to their situation. So, we can look to either start putting cash aside today or given that markets have already had a good sell-off over the last few months, set aside an investment amount that then can be used to move over to the mortgage when they roll off their deal. The closer we get to the deal ending, the more conservative they should be with their cash and/ or investments so we can make sure we have the cash in place to pay down a chunk of that mortgage as the deal expires.

Scenario 2 – Deal expiring shortly

This scenario is where clients have a mortgage that is just coming into its deal expiry. No other changes to their situation and the client has cash and other investments and whilst being relatively on track, still needs to put funds away for the future.

Potential advice: Pay down mortgage with available cash

The rates available today start at around 3.5% and then will soon go higher as the Bank of England continues to forecast interest rate rises. If we consider this 3.5% as a “guaranteed” tax-free return on the investment in the mortgage, then that starts to become very interesting. Markets are very volatile at present and whilst they may come roaring back at some point, still make a fixed return more attractive. The argument could be you are still locking in a low rate whilst inflation is well above this level, but asset prices are not following inflation at this point and this inflation level will come down over the next 12 months or so. Switching cash ISAs or Premium Bonds over to the mortgage could even be considered at this point, but we would just need to be aware of the liquidity issues that may raise.

Scenario 3 – Relatively small mortgage, no plans on moving

This scenario is normally for slightly older clients, where they have paid down their mortgage over the years and are left with say less than 25% of the loan-to-value outstanding.

Potential advice: Let it ride as long as the mortgage is on a repayment plan

If the change in mortgage payments doesn’t inhibit lifestyle or further savings plans and you’re still investing for the future, then perhaps it is better just to leave the mortgage as it is. As long as the mortgage is on a repayment plan, it really will just take care of itself, which allows you to continue to utilise surplus cash to continue to build your wealth for retirement at some point in the future.

Obviously, each scenario above is entirely theoretical and the right advice will always depend on your personal circumstances, however hopefully this has given you some frameworks to consider.

Paying down the mortgage is not always the obvious decision that it seems. If you want some help and guidance, please get in touch to see how we can help.