Deflation could make mortgage repayments more expensive
Inflation has historically made fixed-term mortgages seem like a good bet, according to credit reference agency Experian.
This is because inflation tends to reduce the value of mortgage debt, while wages and salaries tend to rise to match it, making mortgage repayments feel that little bit easier.
However, negative inflation produces the opposite effect. Headline interest rates fall to make borrowing more attractive, but the value of debt no longer sees that ‘chipping away’ effect. This means that for those with a mortgage, deflation can make it feel like a long hard struggle to pay off their debts when their wages and salaries are going down rather than up.
James Jones, head of consumer affairs at Experian, explained: “For those taking out a mortgage, it is important that people work out what they can afford, and plan ahead for unforeseen costs that may make repaying debts harder over the years ahead, future-proofing their finances and ensuring they come out the other end with their credit rating intact.”
Experian has produced the following top tips for potential homebuyers to help them assess what is affordable, now and in the future.
- Know what you have to spend: Consider what funds you can draw together to form your deposit. The size of your deposit will often dictate how much you face in terms of interest rates and lender fees.
- Do your research: Use mortgage calculators and comparison websites or speak to a mortgage adviser to find out where the best deals are and what type of mortgage will suit your circumstances. Work out what you can afford to borrow and repay, both now and if rates rise by 1%, 2% or more.
- Scrutinise your spending: Scrutinising your last few months’ outgoings carefully will help you understand exactly where your money is going. Prepare now by building good habits like increasing the amount you save, clearing overdrafts and cutting back on discretionary spending.
- Check your credit report: Check your credit report with all three credit reference agencies. Ensure everything is accurate and up to date and reflects your current circumstances. If you spot anything you believe to be inaccurate, contact the relevant credit reference agency and ask them to investigate the entry with the lender.
- Room for improvement: If your credit report has areas for improvement, make a plan to get it into shape well before making your mortgage application. There are a number of steps you can take, including: ensuring you’re registered on the Electoral Roll; paying down outstanding balances to less than 50% of your limit; paying off more than the minimum repayments on your accounts each month and making sure never to miss a repayment.
- Don’t fall at the last hurdle: Right before you make your application, take time to do some last-minute checks. Check your credit report again to make sure nothing has changed and everything is accurate right before you apply. Check the exact way your address and other personal details appear on your credit report. Small inaccuracies could see your application turned down, so don’t overlook the details.