Around 1.4m households will face higher mortgage payments this year as their fixed rate deals come to an end, according to the Office for National Statistics.
Many of these households will be used to mortgage rates around 1.5%, or sometimes even less, but will now typically be looking at rates nearer the 6% mark if they want the security of another fixed rate deal.
Managing rising mortgage payments can be particularly challenging when other essential household bills are already putting your finances under pressure.
Mortgage rates have risen steadily following a series of hikes in the Bank of England’s base interest rate. The average interest rate for a two-year fixed rate mortgage currently stands at about 6.76%, compared to just 2.38% a little over a year ago. The difference between these rates would mean someone with a £150,000 mortgage over a 15 year term would see their monthly repayments rise by £336.
Your mortgage is likely to be your biggest financial outgoing, and you may be really anxious about facing much higher costs, especially during a cost of living crisis. Here, we look at some of the ways you could potentially reduce your repayments, as well as how you could manage the impact of rising mortgage costs by increasing your income elsewhere.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
1. Extend your mortgage term
If you’re struggling to meet your mortgage payments, you could consider extending the term of your mortgage to make payments more affordable. Increasing the term from, for example, 15 to 20 years, will spread the amount remaining on your mortgage over a longer period, and reduce your monthly repayments. However, the downside is that you’ll pay more interest over the repayment period. This could be a solution, though, to help make ends meet in the short term. You could always reduce your mortgage term again in the future, or overpay your mortgage (read more about this option below) to pay off your mortgage in the original timeframe.
For example, let’s say you’re looking at monthly payments of £1,212 for a 15-year £150,000 repayment mortgage on a best buy 5.33% five-year fixed-rate mortgage. You could reduce your monthly repayment by £92 by adding two years to your mortgage term, or £195 by adding five years. However, bear in mind that you’ll pay thousands of pounds more interest on a mortgage term that’s extended by just a few years.
David Hollingworth, from broker L&C, says: “It could be possible to extend the mortgage term for those that feel their budget could be stretched too thin.
“However, that comes at a cost and repaying the mortgage more slowly will ultimately increase the total interest paid over the life of the loan, possibly by tens of thousands of pounds. It therefore makes sense to consider reviewing the term again to bring it back down as circumstances allow. In addition there could be limits on how far you can extend the term and lenders will have a maximum age at the end of the mortgage term.”
Find out more about the mortgage options which might be available to you in our guide Mortgages for over 50s: what you need to know.
2. Switch to an interest-only mortgage
If you have a repayment mortgage, you might want to change part of it to an interest-only mortgage to make payments more affordable – although you’ll need a plan for how you’ll repay the original sum borrowed at the end of the term. Read our article How do I pay off my interest-only mortgage?
You may also consider taking out a retirement interest-only (RIO) mortgage, where you only pay the interest on the amount borrowed rather than any capital.
This type of mortgage enables you to carry on making interest payments indefinitely, with the loan paid back only when you die or move out. You can learn more about retirement interest-only mortgages in our guide How retirement interest-only mortgages work. By contrast, a standard interest-only mortgage finishes on a specific date and you must repay the capital you owe on this date.
You can find out more about RIO mortgages in our guide How retirement interest-only mortgages work and about how they compare to lifetime mortgages (a type of equity release scheme) in our article What’s the difference between a lifetime mortgage and a retirement interest-only mortgage?
3. Make sure you’re not on your lender’s standard variable rate (SVR)
Chances are you’ll be paying over the odds on your mortgage if you languish on your lender’s standard variable rate (SVR) when your mortgage deal ends. According to financial website Moneyfacts.co.uk, the average standard variable rate (SVR) is currently 7.76%, compared to just 4.41% in January last year. The lender effectively sets its own interest rate when it comes to SVR mortgages, and they are typically far higher than fixed or tracker mortgage deals.
For example, someone with a £150,000 repayment mortgage with 15 years left to run who is borrowing 60% of their property value would be paying £1,421 a month if they were on an SVR of 7.85%. Their monthly payments would fall to £1,212 a month if they remortgaged to a five-year fixed mortgage rate of 5.33% – a saving of £209 a month or £2,508 a year.
4. Start your mortgage research early
If you’re several months away from the end of your existing mortgage deal, you may not feel there’s a rush to remortgage straightaway. However, it’s best to start your search for a new deal three to six months before your current one ends. This gives you plenty of time to find the best option for you, and move straight onto your new rate when your deal ends.
With further interest rate rises expected this year, the best deals don’t tend to hang around for long.This means that if you do spot a mortgage deal you like – and you don’t have any redemption penalties to pay if you’re leaving your current mortgage – you should grab it while you can. Read more in our article Five good reasons to remortgage right now.
However, if you want to remortgage to a different deal when you’re still within your existing mortgage term, you might face a hefty penalty. Early repayment charges (ERCs) are typically between 1-5% of your outstanding mortgage balance, so it’s vital to check with your lender and seek professional advice before moving onto another deal while ERCs apply.
If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
5. Rent out your spare room
If you’ve got a spare room, you can rent it out and not pay any tax on the income you receive under the government’s rent a room scheme, provided the income doesn’t exceed £7,500 a year. The average cost of renting a room in the UK is currently £626 a month, according to SpareRoom.co.uk, which amounts to around the £7,500 a year annual tax-free allowance.
Bear in mind, though, that if you own your home jointly you don’t each receive a rent a room allowance, and you’ll have to split this between you. You can read more about how the scheme works in our article Renting out a room – What you need to know.
6. Use equity release
If you’re aged 55 or over and unable to afford a sharp jump in your mortgage payments, equity release could provide one possible solution, although it’s not without its drawbacks, not least high interest rates. It’ll give you a lump sum that can be used to pay off your mortgage, and you won’t have to worry about making monthly repayments to pay back what you owe. Any money you borrow will be paid back, with any interest owed, either when you die or move into long-term care. However, it’s vital to seek professional advice so that you understand the implications, as releasing equity could affect your entitlement to means-tested benefits as well as reducing the value of any inheritance you might have planned to leave. Read more in our article How could equity release help with rising mortgage costs?
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
7. Overpay your mortgage
If you’re bracing yourself for a leap in mortgage repayments when your current deal ends, you could consider putting savings towards paying down your mortgage. Of course, you may not have any spare cash to hand, particularly when it may be going towards meeting general living expenses. However, this is one way to pay less interest overall, and reduce the term of your mortgage. It’s usually worthwhile if the rate you are paying on your mortgage is greater than the rate you’re getting on savings. Find out more about whether this option may be right for you in our article Should I overpay my mortgage?
Hollingworth says: “Those that have the benefit of a good fixed rate for some time to come may be able to consider overpaying their mortgage, if at all possible, which would help make the most of the remainder of their current rate and help readjust to what are likely to be higher payments in future.”
Lenders typically allow you to overpay up to 10% of your mortgage balance each year without penalty, and arranging mortgage overpayments is relatively easy. For example, if you have a £200,000 mortgage, you could pay up to £20,000 to reduce your balance that year. Check with your lender on the terms and conditions of your mortgage. You can choose whether to make lump sum overpayments, for example, or regular, monthly overpayments. Ultimately, overpaying should also give you access to cheaper mortgage deals in the future too, as you’ll increase the amount of equity you own.
For example, someone with the same £150,000 mortgage at a rate of 5.33% with 15 years left to run who makes £50 monthly overpayments would reduce their term by 11 months and pay £4,446 less in interest. If they upped their overpayments to £100 a month, they’d reduce their mortgage term by one year and nine months and pay £8,333 less in interest.
8. Ask for help
If you’re worrying about being able to afford rising mortgage repayments, and can’t find a way to make ends meet, you should contact your lender as soon as possible and let them know you’re struggling. Your lender has to make all reasonable efforts to help you manage your debts, and they may explore various options with you such as pausing payments for a period of time, known as a mortgage holiday.
You may also be able to reduce your monthly repayments for a short period of time, extend your mortgage term, or switch to an interest-only mortgage temporarily to make payments more manageable.
Your eligibility for each of these options will depend on a number of factors, including your payment history, whether you have overpaid in the past and your wider financial situation. Read more in our article What can you do if you can’t pay your mortgage?
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
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