Mortgage rates are rising fast: What should you do now?

If your fixed rate mortgage is coming to an end, now is the time to start planning not a few weeks before your deal expires.

UK mortgage rates are rising faster than anywhere else in the G7, despite the Bank of England keeping the Bank Rate remains at 3.75% for the sixth consecutive time. For borrowers coming off older fixed deals, particularly those secured when rates were much lower, the increase in monthly repayments could be significant.

For business owners and landlords, the impact reaches much further than household budget. Higher personal costs may affect how much money you need to take from your company, while rising borrowing costs can put additional pressure on business cash flow and rental profitability.

You cannot control where interest rates go next. But you can understand your options, model the effects and make decisions before you are under pressure.

Why are mortgage rates rising?

Fixed mortgage rates are not determined by today’s Bank Rate alone.

They are also influenced by lenders’ funding costs and financial markets’ expectations of what could happen to interest rates over the next two, five or ten years.

Higher and more volatile energy prices have increased concerns that inflation could remain above the Bank of England’s 2% target for longer. In September, the Bank confirmed that UK inflation had risen to 3.1% in August and warned that it was likely to rise further over the coming quarters.

That uncertainty has fed through to the rates lenders are prepared to offer, even though Bank Rate itself has not increased. It also means that waiting for Bank Rate to fall does not guarantee that the mortgage deal available to you will become cheaper. Mortgage pricing can move before the Bank of England makes a decision and can change quickly when market expectations shift.

Business owners need to consider the wider cost

For a business owner, a higher mortgage payment is not only a personal budgeting issue…

If your household needs an additional £500 each month, you may need to take more money from the company. But withdrawing £500 doesn’t necessarily leave you with £500 to spend. The amount you need to take may be higher once the tax consequences are considered.

Additional income could also:

• Move you into a higher tax band
• Reduce your Personal Allowance
• Affect Child Benefit or childcare eligibility
• Increase your payments on account
• Create additional Income Tax or National Insurance
• Reduce the cash available within the company
• Put pressure on upcoming Corporation Tax, VAT or PAYE payments

Salary, dividends, bonuses, pension contributions and directors’ loans also have different tax and cash-flow consequences. There is no single option that will be right for every owner.

Before increasing the amount you take from the business, you need to calculate the full cost to you and the company. This should include your expected income for the entire tax year, available tax bands and allowances, company profits and reserves, planned pension contributions, benefits in kind, payments on account and the timing of any proposed withdrawals.

With the Autumn Budget approaching, it may also be sensible to review the timing of any significant dividend, pension contribution or other withdrawal. Decisions should not be based solely on rumours, but understanding your current position will make it easier to respond once any changes are confirmed.

Should you use savings or company funds to reduce the mortgage?

Paying down part of a mortgage can provide a big saving by reducing the interest charged. It may also move the borrowing into a lower loan-to-value band, potentially providing access to more competitive mortgage rates/

However, overpaying is not automatically the best use of your money. Before committing to this, consider:

• Whether your mortgage allows overpayments without a penalty
• How much accessible cash you would have left
• Whether you have other debts at a higher rate
• The return currently being earned in your savings
• Upcoming tax bills, repairs or other significant costs
• Whether pension contributions or business investment should take priority
• The effect on your emergency fund and longer-term plans

It’s particularly important to distinguish personal savings and money held in the company.

Using £50,000 of personal savings is not the same as taking £50,000 from a company bank account. Company money will normally need to be extracted before it can be used personally, potentially creating a tax charge.

A director’s loan may be appropriate in some circumstances, but it has company and personal tax consequences and should not be used casually as a way of accessing company funds.

Stress-test your personal and business cash flow

Nobody can say with certainty where mortgage rates will be in six or twelve months. Rather than relying on one prediction, model several possible outcomes.

For your personal finances, compare the monthly payment at different interest rates and calculate how much disposal income would remain after essential household expenses. As a business owner, you should also forecast:

• The additional personal income you may need
• The tax cost of taking that income
• Upcoming Corporation Tax, VAT and PAYE payments
• Existing loans, leases and asset finance
• Seasonal changes in income
• Planned recruitment or investment
• The effect of customers paying more slowly
• Whether the business would retain sufficient working capital

Your bank balance only shows your position today. It doesn’t show the commitments that’ll need to be paid next week, next month or later in the year.

A 12-month cash flow forecast can show the wider effect of the change. Where pressures are more immediate, a detailed 13-week forecast can help you see when cash could become tight and what action may be needed.

What should landlords consider

Landlords coming to the end of older fixed-rate deals may also experience a significant increase in repayments.

A property that previously generated a healthy monthly surplus could begin producing very little cash or may need to be regularly funded by the owner. Each property should be reviewed individually, taking account of:

• Rental income
• Mortgage interest and repayments
• Management fees
• Repairs and maintenance
• Insurance
• Service charges and ground rent
• Compliance costs
• Expected void periods
• Tax
• The equity tied up in the property

It’s important to distinguish between profit, cash flow and capital growth. A rental property can produce a taxable profit while generating weak cash flow. Equally, the capital value may have increased while the monthly return on the equity invested has become relatively low.

This is where you may need some planning. There are various options you can take, such as moving properties into a Limited Company, but you’ll need to speak to an adviser to go through your options properly and the pros and cons.

Don’t overlook business borrowing

The same pressures affecting residential mortgages can also affect commercial mortgages, overdrafts, asset finance and other business loans.

Bank of England figures show that the effective rate on new loans to UK private non-financial companies increased to 5.62% in July. The effective rate on new SME loans rose to 6.61%.

If business borrowing is due for renewal, start the conversation early here too.

Lenders are likely to want current and accurate information, such as:

• Recent statutory accounts
• Up-to-date management accounts
• Budgets and cash-flow forecasts
• Details of existing borrowing
• Evidence that repayments remain affordable
• An explanation of any recent changes in profit or cash flow

Good management information helps you explain the story behind the numbers, showing recurring income, improving margins or the reason for a temporary fall in profit.

The earlier you prepare, the more time you have to improve the information, consider different lenders or facilities and address any potential concerns. A business negotiating under pressure will usually have fewer choices.

How A4G can help

A4G does not provide regulated mortgage advice or recommend mortgage products. We work alongside a number of mortgage brokers, financial advisers and other professionals, including Glen Baker of Fitch & Fitch, who has provided input for this article.

A regulated mortgage adviser can review your requirements, explain the products available and recommend an appropriate option based on your circumstances.

Alongside this specialist mortgage advice, A4G can help you understand how the different options could affect your tax position, household finances, business cash flow and longer-term plans. We can help you:

• Model the effect of different mortgage and borrowing costs
• Prepare personal and business cash flow forecasts
• Review salary, dividends and other ways of taking money from your company
• Calculate the tax cost of withdrawing additional funds
• Assess whether the business will retain sufficient cash and working capital
• Review the profitability and cash flow of individual rental properties
• Model the tax consequences of retaining, selling or restructuring property
• Prepare accounts, management information and forecasts for lenders
• Review the affordability of commercial borrowing
• Work alongside your mortgage broker, financial adviser, solicitor or lender

The interest rate matters, but it is only one part of the decision. You also need to understand what the new repayment could mean for your monthly cash flow, tax position, business resilience and longer-term plans.

If rising personal costs mean you are considering taking more money from your company, or you would like help modelling the wider financial impact, speak to A4G. We can help you understand the numbers and plan the practical next steps.