Worried about your mortgage?
Inflation has exceeded expectations, reaching 8.7% in April, and economists predict that, as a consequence, the Bank of England will need to continue to raise the base interest rate. As a result, lenders are withdrawing numerous mortgage deals from the market, introducing new deals with higher rates to align with the base rate hikes.
While homeowners with fixed-rate loans have been shielded from higher mortgage rates so far due to increases in the base interest rate, many will face significant increases when their current deals expire. It is thought that over 1.5 million homeowners who need to remortgage this year - many of whom will be hit with increased mortgage costs, adding further strain to their already stretched finances.
If your loan deal is ending soon, here are some steps you can take:
- Shop around for the best deal: Check your lender's remortgage options, and explore deals from other lenders. Consulting a fee-free broker can be helpful. It is essential to be realistic - what's available in the mortgage market now - will be more expensive or on less favourable terms than you might have otherwise expected - but shopping around still provides opportunities for minimising the pain.
- Consider a fixed-rate deal: Opting for a fixed-rate mortgage can protect you from rising rates. Your monthly payments will remain the same even if the base rate increases. You will be locked in, though, should base interest rates reduce during the term and not benefit from the reductions in your mortgage costs you'd experience with a "standard" or tracker mortgage.
- Evaluate fixed vs tracker mortgages: Consider whether a tracker or discounted variable rate mortgage would be more suitable before deciding on a fixed deal. While it carries risks of rising rates, it could be more cost-effective depending on future interest rate trends. A fee-free broker can help you understand the options.
- Plan: If you plan to remortgage within the next six months, it's wise to start looking for options now. Many lenders' offers are valid for six months, allowing you to secure a deal and protect yourself from potential mortgage rate increases.
- Consider extending your term: Extending the mortgage term reduces your monthly repayments, which leads to higher interest payments overall. Carefully weigh the pros and cons before deciding based on affordability and priorities.
For those who have already applied for a mortgage, as long as you can provide the required supporting information to meet the acceptance criteria, your rate should be secured based on your mortgage offer.
If you are currently on a cheap fixed mortgage deal, overpayments can help reduce your mortgage balance, minimising the impact of rising mortgage rates. Check if your mortgage allows overpayments and any associated limits.
If, after exploring these options, you are still struggling to pay your mortgage and it is putting an unsustainable strain on your finances, contact your lender as soon as possible to explore options. In considering any enforcement action, they must show that they have been proactive in seeking help and responded sensitively if you reach out to them.
One option they might consider could be to cut down your monthly mortgage payments, usually for a limited period. This might get you over a rough patch and stop debt from building up.
Before you agree to make any changes to your mortgage, you should ask your lender if there will be any charge for this, such as a redemption or administration charge, and how much this will be. If the charge seems very high, you should get advice from an experienced adviser.
Depending on the type of mortgage you have, you may be able to:
- Reduce your monthly interest payments. Your lender will only agree to this if there is equity in your property. This means that the property must be worth more than how much is owed on the mortgage.
- Change to interest-only payments.
- Reduce or stop repayment of the amount you borrowed (the capital) temporarily.
- Increase the period over which the mortgage is paid. This would be more than just a temporary option and would mean you paid more interest in the long term.
Changing payments on your endowment policy
If you have an endowment mortgage, you could think about either:
- Reducing the payments on your endowment policy
- Stopping payments into your endowment policy altogether. You will have to make up these payments at a later date.
Making any changes to an endowment policy can be complicated and financially risky. If you're considering doing this, you should get advice from an independent financial adviser first.
Seek free money advice from organisations like Citizens Advice and Step Change Debt Charity.
Releasing equity in your home is another consideration but should be carefully evaluated due to long-term implications. Remortgaging to pay off debts may have consequences, so weighing the pros and cons is crucial as is taking independent advice.
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