Soaring prices for energy, food and gasoline, amid recession warnings, mean most households will be considering how to keep other costs as low as possible. So what should homeowners do with their biggest monthly expense – the mortgage?
Here are some of the ways you could reduce it.
Mortgage payment holidays
In March 2020, all banks were told by the government that they must offer all customers requesting one a break on repayment of all loans, credit cards and mortgages for up to six months, to help ease some of the financial pressures people faced during the lockdown. .
Although this scheme ended last year, you can still contact your mortgage lender and ask for a payment holiday if you are concerned about how to pay your monthly bills. Whether it is granted or not is now at the discretion of the lender. If they offer you a break, it will usually be for around six to 12 months.
“If you’re having trouble repaying, always contact your lender as soon as possible,” says Brian Murphy, loan manager at the Mortgage Advice Bureau.
“They are required to be patient and do whatever they can to help you through difficult financial times. ”
There are major drawbacks to taking a payment holiday, however, so consider it a last resort.
Even if a bank approves your request for a short break, brokers warn that it will show on your credit report that you haven’t met your monthly repayments. This could affect your ability to remortgage or take out other types of loans for years to come.
Banks will also only offer a break on refunds, not cancel them, which means that once the holiday is over, your monthly bill will be higher than it was before, to offset refunds and interest that the bank has missed.
A better option for the health of your credit report is to extend the term of your mortgage, which will reduce monthly payments by spreading out what you owe over a longer period.
Take a property that cost £450,000, with a £200,000 mortgage and 15 years to go. On an interest rate of 2% for a 5-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 that you will pay more interest in the long run. Nicholas Mendes, technical director of mortgages at John Charcol, says that can add up to thousands of pounds based on just two or three years’ additional interest.
The average life of first-time buyers stretches to at least 30 years, he says, as mortgage and house prices have risen and deposits are stretched even tighter.
Younger borrowers have more time to increase their earning potential and move on to another offer in the future. Banks may be more reluctant to extend your tenure if you’re later in life and may wonder if it will put you worse off in retirement.
Also consider that you are introducing more volatility. The longer your mortgage takes to pay off, the more you are exposed to rising interest rates.
Next month, the Bank of England is expected to raise the base rate, to which mortgage interest rates are pegged, by another 0.5 percentage points from the current 1.75% to 2.25%.
Opt for interest only
Another popular option during the pandemic was to change your style of lending, from a mortgage where you pay both principal and interest on your home, to an interest-only arrangement, where you only pay the accrued interest.
This will significantly reduce your monthly repayments.
On the same £450,000 property, with an outstanding mortgage of £200,000 and an interest rate of 2%, you would reduce your monthly bill by £953 per month (from £1,287 to £334) by stopping the capital repayment.
Again, most lenders will accept this, but they will take into account how much you earn. Some have strict lower income limits – between £50,000 and £100,000 – says Mendes. “If it is joint income, the minimum threshold will be higher.”
You also need to have a plan in place for what you are going to do at the end of the income-only period. Most interest-only borrowers expect to sell their property and downsize to repay the remaining principal.
If it’s not for you, you can decide to overpay later and make up the difference more gradually, or switch to an interest-only loan for a short time while you need it, then pay it back in one sum. lump sum before the term ends.
Again, discuss with your lender what is possible.
It might seem counter-intuitive, with the cost of living getting so high, to consider putting even more money into your mortgage than you already do.
But if you have a good amount of emergency savings and you’re lucky enough to still be on a fixed rate loan before the base rate starts to rise, and with a very competitive, you could save a lot of money in the long run by paying too much now.
“While reducing the balance directly reduces the amount of interest you pay, it also helps build equity in the property, which could provide more and cheaper options when you come to refinance,” says Peter Gettins , product manager at L&C. Mortgages. “A consistent overpayment can ultimately mean the mortgage is paid off years earlier.”
He says almost all mortgages allow some level of overpayment – usually around 10% if you’re on a fixed rate deal – but read the terms and conditions so you don’t accidentally incur charges.
“As always, it’s important to pay off the most expensive debt first, so any interest-bearing credit card balances or more expensive unsecured loans should take priority,” warns Gettins.