I’m worried about my mortgage repayments. What should I do if they rise?

Q My mortgage repayment is rising all the time, it is beginning to cause me stress. When I asked my lender, I was informed I cannot fix the rate. I’m worried repayments will rise to a level I can’t afford. What happens if I default on my mortgage? What can I do if I cannot afford to pay further increases?

A Though this is a difficult question to answer without the relevant individual information, it is a question that unfortunately comes up with increased frequency in my consultations. I empathise with your situation; financial stress and fears of losing your home are very difficult and it is important to bear in mind there is help out there.

It may be useful to understand why rates increase as they do. Higher interest rates are the European Central Bank’s (ECB) primary weapon in bringing down the rate of inflation. By taking money out of people’s pockets – they bring down consumer spending. Higher borrowing costs also slow business investment, and so, demand in the economy falls, there is less money around and inflation eases back. The ECB’s target is to maintain inflation at around 2 per cent, but with headline inflation in the Euro zone currently at 6.9 per cent, this target remains a long way off.

At the time of writing the ECB had raised its interest rate six times consecutively, taking it to 3.5%. A seventh rise of .25 per cent is expected on Thursday, despite cooling inflation. Worryingly, Isabel Schnabel, a top official at the ECB has not ruled out a .5 per cent rise in the coming weeks/months and many observers feel there is still some way to go to start bringing down prices. So far, the ECB maintains higher rates are starting to have an impact but there is more work to do.

While inflation may be easing, it remains stubbornly high and tensions between governments and the ECB may well build as the summer goes on because it’s likely economic growth will slow. But the ECB has the mandate to control inflation, there is only so much governments can do. In fact, this scenario is much more likely to continue because the International Monetary Fund (IMF) called on the ECB to continue raising interest rates until the middle of 2024. The IMF also called EU Finance Ministers to tighten fiscal policy, in a concerted action to reduce inflation, and for good reason. The IMF’s head of the European Department, Alfred Kammer, recently stated “Inflation is a tax, in particular on the poor, and that needs to be tackled”.

Some find themselves in an even trickier situation because the Central Bank reports approximately 115,000 mortgage accounts are held with non-bank lenders, with 82,000 accounts in “non-lending firms” and about 60,000 of mortgage holders trapped with vulture funds. People with these types of mortgages are not offered fixed rates and are charged very high variable rates. Many people are currently being charged variable interest rates of more than 8 per cent, and may be forced into arrears because rising interest rates impact the affordability of their mortgage, and they become very concerned they may be forced to sell their home.

The Money, Advice and Budgeting Service is an independent body that may provide you with information regarding these concerns. I also recommend discussing your options with a financial broker.

This article aims to give information, not advice. Always do your own research and/or seek out advice from a Financial Broker before acting on anything contained in this article.

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