After three years of historic lows interest rates are finally back on the increase. We consider what you can do when your mortgage rate and monthly mortgage payments start to rise.

Although the Bank of England base interest rate continues to remain at its historic low of 0.5%, some mortgage companies have now started to increase the amount of interest they charge to mortgage holders.

For example Halifax is increasing its Standard Variable Rate (SVR) on the 1st May 2012 from 3.50% to 3.99%. A 0.5% rise like this will add £62.5 a month to an average £150,000 mortgage at a time when many home owners are already struggling to cope.

The inevitable increased mortgage payments will cause some home owners to face increased financial difficulties and some who are already struggling may be pushed into a position where they actually miss mortgage payments and get into mortgage arrears. There are however actions that you can take to prevent this.

Change your mortgage

Traditionally if the rate of interest and therefore monthly payments on your mortgage increased, you would have moved your mortgage to another cheaper mortgage company.

However in today’s restricted mortgage market, you may find that transferring your mortgage to another lender is no longer an option.

Even if you are in a position to transfer your mortgage, it is likely that if you are currently on a Standard Variable Rate and changing to a new mortgage company will only increase the interest rate and therefore monthly payments that you have to make

BMD Tip: Trying to swap your mortgage provider may not be possible. However there are other ways in which your current lender may be able to help you such as helping you reduce the cost of your mortgage which you should investigate.

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Reduce your expenditure in other areas

If changing your mortgage to reduce the monthly cost is not an option then the next best thing is to try and reduce your monthly expenditure in other areas. You need to carry out a review of all your monthly expenditures and see where you can cut back.

The best thing to do is first list all your living expenses. Identify areas of your monthly expenditure which are not essential and reduce your spending on these.

If you are able to reduce your spending in some areas this will free up cash to ensure that you have enough to pay your higher mortgage payments and prevent the risk of missed mortgage payments getting into mortgage arrears.

Of course you need to make sure that you manage your money and your expenditure properly so that you stick within your living expenditure budget.

Use a debt management solution

If you have reviewed your living expenditure budget and there is simply nothing you can do to reduce any of your monthly expenditures, you should then consider reducing the payment to your unsecured debts.

If you have outstanding balances on credit cards or catalogues or you have personal loan debts, one of the ways that you can free up cash to pay your mortgage is to reduce the payments you make to these debts using a debt management solution.

The most common debt management solution is a Debt Management Plan (DMP). This will allow you to reduce your monthly unsecured debt payments to an amount you can afford thus releasing cash for your mortgage payments. However as a home owner the downside of a DMP is that there is a risk that your creditors could take legal action against you and apply for a charging order against your property.

To ensure that your property is protected from creditor action you should consider an Individual Voluntary Arrangement (IVA). This is a formal debt management solution and also allows cash to be released so that your mortgage can be paid. However unlike a DMP it also prevents creditors from taking further court action against you or your home. However you may be obliged to release equity from your property to put towards your debt.

Do not put your house at risk

If you find that you are starting to struggle to pay your mortgage because interest rates are increasing, you must take action. If you miss your mortgage payments and get into mortgage arrears, then your house will be at risk of repossession from your mortgage lender.

If you are unable to reduce the mortgage payments by changing your mortgage or free up cash by reducing your other monthly living expenditure, then you will need to take further advice about implementing a debt management solution.

Clearly if you reduce the payments to your unsecured debts, your creditors will not be happy. However if this action is properly managed with a debt management solution, the creditor actions can be minimised.

This course of action is certainly better than to develop missed mortgage payments and allow your mortgage to get into arrears.