If you took out a fixed-term mortgage prior to December of last year, you may be breathing a little easier than friends or family who charge variable rates or recently had to remortgage for a new deal.
In December, the average interest rate on a two-year fixed mortgage was 2.34 percent, but that has now risen to 4.81 percent, according to Money Facts.
Interest rates are expected to continue to rise as lenders and the Bank of England grapple with their response to Chancellor Kwasi Quarting’s “mini budget” on Friday.
Mortgage rate increases come amid a cost-of-living crisis as food and fuel costs are raised and family finances are strained
This led to tax cuts across the board, which panicked the markets and greatly raised the cost of government borrowing.
In addition, the Bank of England increased the base rate last week by 0.5 percent, pushing it to 2.25 percent as lenders move to incorporate the increase in new fixed-rate mortgages.
This is bad news for mortgage holders. As the cost of borrowing goes up, it becomes more expensive for lenders to manage the risks they take on when offering mortgages, and as a result they increase the cost for borrowers.
Borrowers on tracker mortgages that follow the base rate will see another hike in their monthly costs, while lenders are also likely to see costs rise when lenders pass on this increase.
The majority expect rates to continue rising next year, and some expect the base rate to increase to 5.8 percent.
While the lender’s stress tests mean that borrowers who have taken out mortgages since 2014 should be able to afford interest rates of up to 7 percent, these tests don’t take into account broader economic pressures such as rising inflation affecting overall household budgets. .
In August, inflation was 9.9 percent, far from the Bank of England’s target of 2 percent, driven by energy and food prices.
Borrowers with variable rates are more susceptible to increases than those with fixed rate deals, since the latter will only be affected when they reach the mortgage.
Mortgage arrears reached a 12-year high of £2.05bn at the end of the first quarter of 2022, the highest figure since June 2010 when arrears touched £2.09bn, according to data from the Bank of England and the Financial Conduct Authority.
Homeowners should continue to make their mortgage payments at their current level if at all possible. However, the unprecedented nature of the current price hikes and inflation may mean that some can no longer afford to.
Talk to your mortgage lender early
“If you’re falling behind or experiencing difficulties, the best advice is to speak with the lender,” says Nick Mendez, John Charcol’s Mortgage Technical Director.
‘family [budget] Pressures are mounting like never before, and mortgage rates are increasing. It’s a double whammy.
Advice to clients from the FCA is that if a customer is in arrears (meaning they have missed a mortgage payment) or is at risk of being in arrears, they should speak to their mortgage provider as soon as possible.
They will run through the clients budget with them to get the best idea of the options available.
It is also worth checking your insurance policies as some of them include mortgage coverage under certain circumstances.
There are several ways to reduce your monthly payments in the short term – although most of them will mean that your mortgage will cost more in the long term.
Switch to an interest only mortgage
The first option to lower your costs might be to temporarily switch from paying down mortgages and interest to an interest-only option.
This effectively pauses the outstanding mortgage at its current level. The borrower will stop paying the loan balance, and instead only pay the interest due each month.
“The interest only will reduce the monthly payment which can provide some valuable breathing space,” explains David Hollingworth of L&C mortgage broker.
However, this step should be treated as temporary. The borrower will have less time to pay off the mortgage balance once they return, and more interest will have to be paid each month to make up for the lost time.
The biggest risk is if the mortgage is not converted into repayment. This can become a major problem if the end of the term is reached with no way to pay off the balance of the mortgage.
Often, borrowers in this situation are forced to sell their homes to pay off the bank.
Ask for a mortgage payment leave or reduction
The second option is to ask the lender for a mortgage payment holiday, also known as a payment holiday. This allows the homeowner to temporarily stop or reduce their monthly mortgage payments.
Payment holidays have been used by some borrowers who were struggling financially during the pandemic, as banks were required to offer them to any customer looking for one.
In the first three months after the scheme was launched, one in six mortgages were subject to payment deferment, with the outstanding payment totaling £755 per month.
Banks are no longer required to offer payment holidays to borrowers, but those who are struggling can talk to them and ask for one. Lenders are more likely to want borrowers to maintain a certain level of repayment each month, rather than stop altogether.
Research by the Bank of England shows that deferred mortgage borrowers during the pandemic were less likely to cut their spending elsewhere.
Warning: Lowering your mortgage payments in the short term will usually result in an increase in the total amount due
Again, it’s important to remember that payments will be more expensive once the vacation is over, in order to pay off the mortgage by the end of the term. The additional interest accrued will be added to the outstanding mortgage.
“You have to factor in the increased cost of paying in general,” Mendes said. “You can defer payment or reduce your monthly payment, but in six months, your payment will have gone up.”
Extend the term of your mortgage
The third option is to extend the term of your mortgage in order to spread the payments over a longer period of time. For example, you can extend a 25-year mortgage for an additional five years to a 30-year term.
For those with a fixed deal, this usually has to be done at a remortgage point. Banks don’t usually offer 40-plus-year mortgages, and they often won’t extend your mortgage if it means you’ll have to keep paying it until retirement or past a certain age.
Again, this will help reduce the amount of each monthly payment, by restructuring the mortgage in the long run but will come at a greater cost in terms of interest payments.
However, unlike the interest-only option, this means that the mortgage will eventually be paid off, even if the term is not scaled back to the original time frame.
Mortgage interest program support
In addition to direct solutions with your lender, the government operates a mortgage interest subsidy scheme that lends money to low-income people to help them make their mortgage payments.
The program offers low interest loans from the Department for Work and Pensions to help pay the interest component of the mortgage. It cannot be used to pay off the balance.
It is only available to homeowners who already receive government benefit support such as Income Support, Income Based Job Seekers Allowance, or Pension Credit.
The money obtained through the system is a loan – not interest – which means it is added to the amount owed on your home.
There are also services such as Citizens Advice and Money Helper that provide free, independent advice on financial issues and may be able to discuss options with you.
For those who think they will struggle with long-term mortgage payments, another option is to consider selling the home, possibly moving to a smaller property with cheaper mortgage payments.
This is more true for those who have a large property in their home, which they can use as a deposit for other property or even to purchase one outright.
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