If you’re buying a home, or are due to remortgage soon, the chances are you’re probably feeling pretty anxious about your finances right now.
A series of interest rate rises aimed at curbing inflation is piling financial pressure onto millions of borrowers who are facing steep increases in their monthly mortgage payments. Read more in our article Interest rates held at 5.25%: how to manage rising costs.
If you’re approaching the end of your fixed rate deal, are on a variable rate or looking to buy a home, the recent increases could be disastrous for your finances. Borrowers taking out a mortgage today face average two year fixed rates of 6.47%, according to Moneyfactscompare.co.uk.
Here, we look at how homeowners can potentially manage soaring mortgage costs, and where to seek further help.
1. Find out when you can remortgage
If your mortgage deal is coming to an end within the next six months, you may want to move quickly to secure a new deal as rates could have further to rise. Lenders will typically allow you to sign up to a new deal up to six months before your current deal’s expiry date. Remember that you’ll usually be moved onto your lender’s standard variable rate (SVR) when your current deal ends, and this rate is usually much higher than others on the market.
Teddy Cenaj, mortgages expert at Rest Less Mortgages, said: “You can make sure you get your mortgage application started and have your offer in early so you have peace of mind that you know where you stand.”
Don’t just accept the first deal offered by your lender, as you should always compare deals across the market so that you can be certain you’ve found the most competitive deal possible. A mortgage broker can help you find the best deals for you based on your individual circumstances.
Choosing the right mortgage deal can be particularly difficult in uncertain times. If you choose a fixed-rate deal, your mortgage payments will remain the same whatever happens to interest rates. However, if interest rates fall during the term of your deal, you wouldn’t benefit from a reduction in repayments. Read more in our article Should I go for a fixed or variable rate mortgage? and Four things to consider when remortgaging.
2. Make overpayments now to reduce impact of higher payments
If the amount of mortgage interest you’re paying is greater than the interest you’re earning on your savings, it could be wise to use some of this cash to make mortgage overpayments. That’s provided you’ll still have a savings pot in place to use in the event of an emergency.
For example, if you have the same £150,000 repayment mortgage with 15 years left to run and are paying an interest rate of 5.28%, you could knock 11 months off your mortgage term and save £4,393 in interest if you made monthly overpayments of £50. This rises to 1 year and nine months off your term and £8,234 less in interest if you made £100 monthly overpayments. Most lenders allow you to repay 10% of your mortgage balance penalty-free every year, but you should check with your lender before doing so to ensure you won’t incur any early repayment charges.
If you’re fortunate enough to have any spare cash, it may be worthwhile using this to reduce your mortgage balance and clear this debt quicker. The majority of lenders will let you overpay by up to 10% of your mortgage balance each year without penalty.
Bear in mind, though, that if you’re still on a mortgage deal you took out a couple of years ago, your rate is likely to be low. In this scenario, you could keep saving to take advantage of the interest rates currently on offer until your fixed-rate deal ends, and then think about using it to reduce your mortgage balance.
Make sure that you don’t face penalties for overpaying your mortgage. If you overpay by more than this you may incur a hefty Early Repayment Charge (ERC). This is usually between 1% and 5% of your outstanding balance. Read more in our articles Should I overpay my mortgage and Mortgage fees and costs explained.
3. Pay your mortgage for longer
You should be able to discuss a range of options with your lender to manage rising repayments, without this affecting your credit score.
These may include extending your mortgage term to reduce your repayments. For example, if you extended your £150,000 mortgage on a rate of 5.28% from 10 to 15 years, your monthly payments would drop by £394 a month from £1,602 to £1,208. Remember, though, that this will increase the amount you pay back overall.
The government announced earlier this year that borrowers would be able to make a temporary change to their mortgage terms, such as extending the term (or switching to interest-only) and be able to return to their original deal within six months. This would allow some to have lower repayments for a short time. This six-month flexibility will also not affect your credit score, as it may have done previously. Find out more in our article Government announces support for mortgage holders.
4. Consider a temporary switch to interest-only
If you are struggling then you may be able to move from repayment to an interest-only mortgage for a while, depending on your lender’s terms and your personal circumstances. This reduces payments because you are not paying off any of the capital, only the interest on the loan. However, you will need a plan for how to repay the capital in the long term.
If you’re in your 50s or 60s, you could consider switching to a particular type of mortgage called a retirement interest-only (RIO) mortgage. Standard interest-only mortgage deals typically come with age restrictions for when the debt must be repaid whereas retirement interest-only mortgages don’t, although you’ll usually need to own a significant amount of equity in your property to qualify.
Retirement interest-only mortgages enable you to carry on making interest payments indefinitely, with the loan paid back only when you die or move out. By contrast, a standard interest only mortgage finishes on a specific date and you must repay the capital you owe on this date. Read more in our article How retirement interest-only mortgages work.
5. Seek further help
If you cannot make use of any of these strategies, you may be left with few options. However, you could consider asking for a mortgage holiday, where repayments would cease for a temporary period.
Depending on your circumstances and previous payment history, you might be able to take a break for up to six months. However, not all lenders offer this option — it often depends on the product’s terms and conditions and your individual circumstances.
Think carefully before taking a mortgage holiday, as your credit file will be affected and it could impair your ability to get credit in future. You will also be racking up interest even when you are not making payments.
There are also charities that provide free and independent advice with finance issues and may be able to discuss options with you. Some charities and organisations that may be able to help and offer free guidance include Citizens Advice, StepChange, and National Debtline. Read more in our article What can you do if you can’t afford repayments and Will I lose my home if I can’t afford my mortgage?
If you feel like you’re struggling to cope, please talk to someone as soon as possible. Find out where to go for help in our guide Are money worries affecting your mental health?
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