Spiralling energy, food and petrol prices, amid warnings of a recession, mean most households will be thinking about how to keep other costs as low as possible. So what should homeowners do about their biggest monthly outgoing – the mortgage?
Here are some of the ways you could trim it back.
Mortgage payment holidays
In March 2020 all banks were told by the government they needed to offer any customers who asked for one a break on repayments of any loans, credit cards and mortgages of up to six months, to help alleviate some of the financial pressures people faced during lockdown.
While this scheme came to an end last year, you can still contact your mortgage lender and ask for a payment holiday if you are concerned about how to meet monthly bills. Whether it is granted or not is now at the lender’s discretion. If they do offer you a break it would typically be for about six to 12 months.
“If you are ever struggling with repayments, always get in touch with your lender at the earliest opportunity,” says Brian Murphy, head of lending at the Mortgage Advice Bureau.
“They are required to exercise forbearance and to do whatever they can to help you through a difficult financial period. ”
There are major downsides to taking a payment holiday, however, so treat it as a last resort.
Even if a bank approves your application for a short break, brokers warn it will show on your credit file that you have not met your monthly repayments. This could damage your ability to remortgage, or take out other types of loans for years to come.
Banks will also only be offering a pause on repayments, not writing them off, which means once the holiday is over your monthly bill will be higher than it was before, to make up for repayments and interest the bank has missed.
Extend the term
A better option for the health of your credit file is to extend the length of your mortgage term, which will bring down monthly payments by spreading what you owe over a longer period.
Take a property that cost £450,000, with a mortgage of £200,000, and 15 years left to go. On an interest rate of 2% for a five-year fixed-rate loan, you could reduce your monthly repayment by £130 (from £1,287 to £1,157) by adding two years, or £275 (from £1,287 to £1,012) by adding five years, according to figures from mortgage broker John Charcol.
The catch is, you will pay more interest in the long run. Nicholas Mendes, mortgage technical manager at John Charcol, says this can be thousands of pounds based on just two or three years’ added interest.
The average term for first-time buyers is extending to at least 30 years, he says, as prices on mortgages and homes have increased, and deposits are even more stretched.
Younger borrowers have more time to increase their earning potential and move to a different deal in future. Banks may be more reluctant to extend your term if you are in later life, and may question whether it will put you in a worse position in retirement.
Also consider that you are introducing more volatility. The longer you have your mortgage to repay, the more you are exposed to rising interest rates.
Next month it is expected that the Bank of England will raise the base rate, on which mortgage interest rates are pegged, by a further 0.5 percentage points, from the current 1.75% to 2.25%.
Another popular option during the pandemic was to switch styles of loan, from a mortgage where you repay both the capital and interest of your home, to an interest-only deal, where you clear just the interest that accrues.
This will cut your monthly repayments dramatically.
On the same £450,000 property, with a £200,000 mortgage outstanding, and a 2% interest rate, you would cut your monthly bill by £953 a month (from £1,287 to £334) by stopping capital repayment.
Again, most lenders will entertain this, but they will take into account how much you earn. Some have strict lower limits of income – of between £50,000 and £100,000 – says Mendes. “If this is a joint income, the minimum threshold will be higher.”
You also need to have a plan in place for what you’re going to do when the income-only period comes to an end. Most interest-only borrowers expect to sell their property and downsize to repay the capital sum left over.
If this isn’t for you, you could decide to overpay later down the line and make up the difference more gradually, or shift on to an interest-only loan for a short period while needed, and then repay in a lump sum before the term ends.
Again, discuss with your lender what is possible.
It may feel counterintuitive, while the cost of living is becoming so high, to consider throwing even more money at your mortgage than you already are.
But if you have a healthy amount of emergency cash savings, and are lucky enough to still be on a fixed-rate loan from before the base rate started to rise, and with a very competitive interest rate, you could save a lot of money over the long term by overpaying now.
“While reducing the balance directly cuts the amount of interest you pay, it also helps build up the equity in the property, which could make more, and cheaper, options available when you come to refinance,” says Peter Gettins, product manager at L&C Mortgages. “Consistently overpaying can ultimately mean the mortgage is repaid years early.”
He says pretty much all mortgages allow some level of overpayment – usually about 10% if you’re on a fixed-rate deal – but read the terms and conditions so that you do not accidentally incur charges.
“As always it’s important to pay off the most expensive debt first, so any credit card balances incurring interest, or more expensive unsecured loans should take priority,” warns Gettins.