The latest jump in the Bank of England base rate to 5% was not only larger than expected – it means a big increase in pressure for anyone with a mortgage.
Some, who arranged their mortgage in the halcyon days of 0.1% base rate are seeing their monthly mortgage commitments rocket as the Bank of England hikes rates to combat inflation.
Simply tightening the belt will not be enough for some. But the good news is that there are steps you can take to make your mortgage affordable.
At Continuum, we are looking at the solutions.
1. Consider a fixed rate?
Being at the mercy of a volatile bank rate means that the rate you pay will change – and when bank rates head up, so will your mortgage repayments.
Fixed-rate mortgages remain the most popular option. They mean bills will remain the same for the duration of the fixed term –anyone who arranged a 10 year fix back in 2021 will be sighing with relief now. The problem is that if you fix now the rates are likely to be steep, as lenders try to price in what could happen further down the line. You’ll be paying extra interest in case things get worse. If they don’t, you could be paying more than you need to.
2. Think about a tracker?
Despite the risk that your payments could increase at any time, tracker mortgages might be a solution. These mortgages are directly linked to the Bank Rate, so there may be some increases to come, but in the current market they could be priced lower than a fixed-rate deal. If inflation started to fall, the bank rate could potentially come back down. Tracker mortgages would fall with it.
3. What about interest-only?
Interest-only mortgages used to be a popular solution for homebuyers. With them you pay the lender just the interest each month, and not the capital. The idea is that you build up the capital with an investment product or use other sources of incomes such as inheritances when the time comes.
Before 2014, when rules around mortgages were tightened, lenders did not have to verify borrowers’ income, and in many cases repayment plans were simply not in place. Now lenders have strict eligibility rules for interest-only payments – including minimum income thresholds and equity requirements.
Going interest-only for a short spell could help with a short-term cashflow crisis, but it might not be a suitable long-term answer.
4. Try an offset
If you have a large savings pot, you may be able to use it to cut your mortgage costs, with an offset mortgage.
An offset mortgage allows you to offset your mortgage balance against the balance held in any linked accounts with the same lender. You don’t receive the interest your savings should earn –it goes towards the interest on your mortgage.
The money in your savings account is safe, and you don’t eat into it to pay your mortgage. You can still access it whenever you need to. But the more you put away, the less you pay.
This can also save you tax. If you don’t earn interest on your savings you won’t pay tax on it. If you have a large sum saved or are an additional-rate taxpayer and don’t qualify for any personal savings allowance, this can be a big saving.
That being said, this cash won’t grow in value either, so you’ll need to consider whether the money you save on mortgage interest outweighs the savings interest you’re giving up.
5. Extend your term
Spreading out your mortgage payments could mean your monthly repayments are reduced – although your overall payments will be considerably increased. First-time buyers are now turning to mortgages of 35 years or even longer, to reduce monthly payments. It’s something homeowners facing problems could consider as well.
But be careful. Will you be able to make mortgage payments when you’re past retirement age, quite possibly in your 70s?
6. Talk to an expert
At Continuum we know the solutions, the kind of deals being offered across the entire lending market – and we can help you find the solution that is most suitable for you now.
If you’re struggling to meet your payments you need to find a solution sooner rather than later. And even if you are not, there may be ways to cut the cost of your mortgage.
Call us today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage products, you should seek independent financial advice before embarking on any course of action.
Your home may be repossessed if you do not keep up repayments on your mortgage.