Over the past 18 months the incomes of many homeowners have been squeezed as employers have been forced to introduce shorter working weeks, and pay cuts. However, the massive increase in mortgage defaults and home repossessions predicted by the Council of Mortgage Lenders (CML) at the beginning of 2009 has not materialised.

The reason for this is simple. With interest rates at all time lows many have offset reduced incomes with significant decreases in their monthly mortgage payments.

The problem is that when interest rates eventually rise this could spell disaster for many homeowners. We explain your options if your mortgage payments start to increase and this means you start to struggle to meet them.

Interest rates will rise eventually

The general view of economists is that interest rates will not start to rise in the next couple of months. However, they will not stay low for ever.

With predicted increases in VAT to 20% on the horizon, inflation which is currently above the government’s target of 2% may well continue to rise. The bank of England’s only weapon to prevent this is to increase interest rates.

With the banking industry fighting to regain cash reserves, it is certain that as soon as the Bank of England increases its rate even slightly, standard variable mortgage rates (SVR) will jump. Suddenly homeowners who had been managing to keep their heads above water will start to struggle.

How to prepare for higher mortgage costs

If you are worried that an increase in the cost of your mortgage will make it difficult for you to maintain your payments, you need to protect yourself by taking action now.

You must get a good understanding of how much money is coming into the household each month and exactly what you are spending. Write down your income and all of your monthly expenditures.

If you are barely covering your costs each month, you must anticipate that as interest rates rise, you will begin to struggle. You must therefore look for areas where you can cut back.

My advice is that you should not wait for interest rates to rise. Start to reduce your monthly expenditure straight away. If this means you are able to start saving some of your funds, then building up a small amount in reserve is no bad thing.

BMD Tip: If you are unable to reduce your monthly living expenses you may be able to get additional help your mortgage lender such as extending the length of your mortgage to reduce the monthly payments.

Reduce your unsecured debt payments

If you have reviewed your monthly budget and found that you are actually unable to meet all of your expenses, you may need to consider reducing your personal debts (credit cards, store cards, personal loans) using a debt management solution.

There are a number of solutions which may be suitable however, it may well be worth investigating a debt management plan and or an Individual Voluntary Arrangement (IVA).

Both of these solutions involve an agreement with your creditors to reduce the monthly payments you make meaning that you have enough cash available to maintain your mortgage payments.

Remember, if you believe you have a debt problem, it is vital that you maintain your mortgage payments otherwise your home will be at risk of repossession.

Exactly when interest rates will increase is not known. Most economists agree that they will start to rise towards the end of 2010 or early 2011. However, the one certainty is that they will eventually go up.

When this happens, increases in the cost of paying a mortgage will swiftly follow.

If you believe that you will find it difficult to pay your mortgage if the payments increase or if you are already struggling to make your payments, it is very important that you act now or risk losing your home.