As the cost of living continues to rise with wages struggling to keep up, families across the UK are finding it difficult to meet one of their biggest monthly outlays; the mortgage.
Those homeowners on variable rates, or those who have come to the end of low fixed rates from a few years ago, are likely to have seen a rise in their monthly payments with the cost of borrowing going up.
Variable rates follow the Bank of England base rate, which in August rose to its highest level since 2008, at 5.25 per cent – meaning the mortgage will be taking a larger chunk of families’ income.
But what happens when the pressure becomes too much on family finances and the monthly repayment becomes unaffordable?
There is help is at hand with a number of little-known short-term solutions that are part of a government mortgage charter signed by lenders last year.
One option opened for repayment mortgage holders is to switch to an interest-only mortgage for up to six months which, as capital is not being paid off, will reduce the amount paid each month.
To be eligible, the account needs to be up to date with payments with no arrears, and it needs to be a residential mortgage, not a buy-to-let. Those who take up the option, by calling up their lender, will face no affordability check and their credit score will not be impacted.
There is a drawback, however; by switching to an interest-only mortgage for six months, account holders will essentially defer payments on capital which means, if the mortgage lifetime remains the same, monthly repayments will be higher after the six-month term.
Although, if rates go down, people could be paying less on the remaining borrowed capital.
An example is if an account holder had £200,000 left to pay on a £300,000 mortgage with a 25-year term, and was on a rate of 5 per cent, the monthly repayments would go from £1,169.18 a month to an interest-only payment of £833.33 a month. That’s a saving of £335.85 a month, or £2,015.10 over six months.
Another option of support under the charter includes extending the term of a mortgage by six months, or more, to reduce monthly repayments. Again, applicants would face no affordability check and would not have their credit score impacted.
Announcing the charter in June last, chancellor Jeremy Hunt said the measures gave people a “powerful new tool” to help manage their monthly budges.
He added: “If you are anxious about the impact on your family finances and you change your mortgage to interest only or you extend the term of your mortgage and you want to go back to your original mortgage deal, within six months, you can do so, no questions asked and no impact on your credit score.”
Another measure as part of the charter includes lenders being unable to repossess homes within 12 months of a first missed payment. There’s also the option to “lock in” deals six months ahead, although with rates now falling this is now probably not the best option for many.
