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Base rate hikes make protection vital

Although it was not anticipated for another few months, the Bank of England has hit us with an early interest rate rise of 0.25 percentage points, taking the interest rate to a five and a half year high of 5.25%.

This is the third quarter point rise in five months and the intention, according to analysts, is to curb inflation which they believe is likely to be well above the BoE’s target when the official figure is announced in February.

For most people, the first thing they think about when faced with this news is the effect the increase is likely to have on their mortgage payments. In practical terms this equates to an extra 16 a month on a 100,000 variable repayment mortgage.

Given that the average house price is 186,000, this means an extra 27.72 per month or 332.64 per year with a 100% mortgage. Not good news, especially when many believe we will see at least one more rise this year – and sooner rather than later.

Approximately 60% of home buyers have variable mortgages and face the prospect of finding this extra cash every month. A rise in interest rates is always a concern for home owners, especially those who have extended themselves by purchasing a property they can only just afford or those who have other debts they are trying desperately to manage at the same time as mortgage repayments.

With more and more families bringing in two incomes it’s easy to borrow the maximum available based on dual income. While monthly salaries keep getting paid, so do the bills.

But when one income stops, panic can strike. Without this income families can be faced with the devastating prospect of having to decide between paying the mortgage and buying food or clothing.

Repossessions, although low in comparison with the 1990s, ran at their highest for five years during the first half of 2006. The concern is that with increasing interest rates and mortgage repayments becoming a bigger burden, this trend will continue.

As we know there are numerous reasons an income can be lost – a death, a critical illness or disability. Without this money families are faced with a struggle to prioritise and in many sad cases this can result in homes being lost.

With another rate rise predicted it is important that you ensure your clients understand how important it is that their incomes are protected when they are buying a house or remortgaging.

Don’t be afraid of asking your customers hard-hitting but essential questions such as, if you’re hit with a critical illness and have to stop working, how will you pay your mortgage?

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