In a move to help mortgage borrowers to cope with their payments during the ongoing financial crisis that the UK finds themselves in, ministers in the government have called for mortgage lenders to be more understanding and accommodating to those struggling. Lenders are being encouraged to offer mortgage payment breaks or holidays as well as allowing existing borrowers to make changes to their current loan such as changing to interest only from repayment to make the monthly commitment more affordable.
Mortgage Lenders Could Offer Payment Breaks
A mortgage break, pause or holiday would see borrowers being able to have a few months off paying their loan until they can make arrangements to accommodate increasing interest rate payments. A similar scheme came into play during the height of the COVID-19 pandemic, but has since been discontinued. This of course is not a permanent solution to the issues that borrowers are facing, but could alleviate some money woes temporarily.
Mortgage Lenders Could Allow Borrowers To Change Their Deal Early
Another proposed option is that lenders could allow borrowers to break their current mortgage deal and change how they pay their loan. The majority of residential borrowers in the UK will have a repayment mortgage. This means that the borrower will have a fixed rate loan for a period of 2 – 5 years generally where they will pay back the capital of their loan per month + some interest on the money borrowed. As interest rates have increased, a lot of people are finding that the combination of capital repayment and interest has become too expensive for them to afford.
The new proposed option could see borrowers switching their repayment loan to a purely interest only loan, significantly reducing their monthly commitment.
Previously, this has received a lot of ‘bad press’ – but ultimately people need more advice with regards to this sort of mortgage loan. It is important they know the full impact and have a long-term strategy in place with regards to how they intend to pay down the loan if they opt for interest only.
People who have their residential home on interest only and reach retirement age without paying down their mortgage could end up in tricky financial situations. For those reaching the end of the mortgage term after having the loan on interest only, it means that they haven’t paid down any of the debt. So, some people will have no way of paying back the loan, other than selling the property. With this being their home, it obviously can become quite a sensitive and emotional matter.
However, there are benefits to interest only. It allows the monthly payment to be lower, so it can be potentially more affordable to clients, but there is an argument that the loan should only be offered and taken up if the clients can afford to repay it. Generally, interest only for residential mortgages is mainly available to those already in a fortunate financial position. (As the lenders require clients to have a minimum income (£75k – £150k depending on lender), a minimum amount of equity in the property, and a maximum loan to value ratio too. They also must be able to satisfy the lender that they have a suitable repayment vehicle to pay down the mortgage when needed).
Borrowers Opting For Interest Only
Banks being encouraged to be flexible and helpful to those struggling is something that we agree with as being a ‘good idea’. However, interest only as a way of coping financially should not be relied upon in the long term for residential mortgages (unless clients have a method of paying back the loan -such as sale of another property or savings etc).
It could be helpful in the short term for people – as it is much better than having a later or missed mortgage payment showing on your credit report.
But, if people rely on this in the long term, then they may find themselves having to sell their home before they retire, but not have much equity or money available to buy another.
If you or anyone you know is concerned about rising mortgage costs, feel free to give our team a call today. We are here to help.