Many people may be heading for an increase in their mortgage costs.
In theory, generally, home loans should never become unaffordable. Lenders have been obliged to ‘stress test’ mortgage offers, to ensure that borrowers can still afford repayments even if – or rather when – an increase in bank rates make increased mortgage costs certain.
But although many people should be able to afford the current mortgage increases with some tightening of the belt, rates seem set to continue upwards. Increasing bank rates likely make increasing mortgage costs unavoidable, at the same time that inflation is putting pressure on family budgets.
Inevitably some people will find that the sums no longer add up, and the dream home they bargained for is turning out to be more expensive than anticipated.
At Continuum we are looking at what we can do to help.
If you look back a generation or two, our parents and grandparents more often took 25 years to pay off their mortgage.
Rising house prices have made that rarer, and mortgages spread over 30, 35 or even 40 years are now commonplace. Many commentators refer to government statistics which suggest we are living longer, and some of us are likely to work until aged 70. If we are going to live much longer and likely work until at least aged 70, a longer term mortgage shouldn’t always be viewed as a bad thing
If an existing mortgage is becoming a burden, remortgaging to a deal over a longer term could reduce the monthly repayments. However, you need to be aware that your existing lender might apply an Early Repayment Charge if you were to re-mortgage.
It sounds tempting, but the short-term savings come at a hefty price. You pay less each month, but the total amount you pay for what you borrowed ends up being a lot more. For example, adding five years to your mortgage term is another 60 payments.
Extending your mortgage might not be practical if means working into your 70s.
If you are an older home buyer facing financial challenges and without the prospect of many years of work – and a mortgage that has become a burden, it may be possible to use some of the equity built up in your home to help deal with the ongoing cost.
Equity release schemes can look tempting. They could provide cash now, for example, with a lifetime mortgage the lender, would sell your home if you go into long term care or after your death to recoup their investment and all the time interest is rolling up.
Releasing cash can offer a lifeline for those who need to pay off existing mortgages that have matured. For example, interest only loans, that have matured leaving a capital sum to be repaid – but there are some very large pitfalls which you need to understand before making an irrevocable decision. There may be better alternatives for you and your family.
Reducing your LTV
Generally, lenders more favourable deals are for people with bigger deposits or more equity built up in their home. There are sound business reasons – if the price of the home falls, the loss falls on the owner, not the lender.
So, the lower your property’s loan-to-value (or LTV) the more suitable the product to meet your circumstances may be available, subject to meeting lenders terms and conditions The good news is that if you have owned your home for a year or two, it has probably increased in value, reducing the proportion of the value that you are borrowing.
This means that you have a lower LTV, potentially putting you in the market for a more competitive rate on your mortgage.
Not owned your home long enough for house price inflation to have done its work? You might have improved the value of your home if you have had major improvements such as an extension or a loft conversion done.
But there is another way to get a lower LTV. By using any spare funds to reduce the amount you are borrowing, you may be able to get into a lower LTV bracket.
What to do now
If you are thinking about your mortgage and need to get some help. At Continuum we can put our expertise to work for you.
We can explain the options and help you find the answers that are right for you.
We are independent, which means that we can source mortgages from across the entire market. We can look at the potential of extending your term, releasing equity or simply finding a more suitable product.
Call us now, and we can get to work to understand the problems your current mortgage is presenting – and discuss the options available which may reduce your monthly mortgage cost.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a suitable mortgage or Equity Release product, you should seek independent financial advice before embarking on any course of action.
Equity release will reduce the value of your estate and may affect your entitlement to means tested state benefits.