The last few months have been tough, there is no question about that. A rising cost of living in the UK has meant that the average person is now paying more for utilities like gas, water and electricity. They are paying more than ever before for food and drink. Petrol and Diesel are now between £1.50 and £1.80 a litre and mortgage interest rates have quadrupled in many cases. Unfortunately there isn’t much that we can do about utility bills and petrol, but we can potentially help with mortgage payments. So what can be done if your mortgage payments are too high for you to handle?
Struggling To Afford Mortgage Payments
If you are finding mortgage payments are too much for you to manage at the moment, don’t worry. You aren’t alone. Over the last 5 months some mortgage interest rates have literally gone from sub 2% to over 7%. The average mortgage payment is now around 4-5% interest with lenders now starting to release sub 4% rates. All arrows point towards interest rates settling between 3 and 4% within the next year, which is great news. But, after years of enjoying manageable 1-2% rates, a lot of borrowers will be going on to higher rates soon that they can’t comfortably afford to pay.
Let’s look at an example of how much a typical mortgage payment could go up per month for someone coming off of a 5-year fixed product arranged in 2018:
A 30 year old who borrowed a mortgage of £300,000 in 2018 could have feasibly secured a 2% mortgage over 25 years. That would be around £1,272 a month for their mortgage payments. This person has been able to comfortably afford this mortgage over the last five years. However, their 5 year fixed rate has now come to an end in 2023 and they need to switch to another fixed rate product.
The cheapest rate available to them on the market is now 5% (hypothetically) meaning that their mortgage payments will increase from £1,272 per month to £1,754 a month. An increase of £482 a month. An increase that a lot of people can’t afford to pay. So what can be done to reduce the payments and make them more manageable?
Can I Extend My Mortgage Term To Make The Payments Lower?
One way that a mortgage advisor can potentially help to make your mortgage payments more manageable for you is by looking at extending your mortgage term when it comes to remortgaging. The longer you to take a mortgage for, the lower your mortgage payments will be. It’s as simple as that. With most mortgage lenders, you are allowed to take a mortgage up until retirement age which most estimate as 70 years old. Some lenders will also allow you to take a mortgage out until you are 75.
In the case of the hypothetical mortgage borrower above, they could quite easily extend their mortgage term to 35 or even 40 years depending on the lender, to make their payments lower. A 35 year term would potentially bring the payments down to £1,514 a month and a 40 year term would bring it down to £1,447 per month. The borrower would still be paying more than they were before the rate increases, but much less than if they had kept the 25 year mortgage term.
Remember that taking a longer mortgage term does not necessarily mean that you need to keep the mortgage for 35 or 40 years and it definitely doesn’t mean that you will be stuck on a rate of 5% forever. Most people remortgage or product transfer ever 2 – 5 years and as rates are coming down, there is a possibility that you could remortgage to a lower rate and decrease your mortgage term when things are more manageable.
Can I Put Half Of My Mortgage On Interest Only To Bring The Costs Down?
Another potential option for people who believe their mortgage payments are too high, is putting part of your loan on interest only. This route is normally subject to a lot of stringent affordability criteria and most people going down this route will need to earn a minimum income (somewhere around £75,000) to be accepted as well as having a minimum amount of equity in their property. The best thing to do if you think that this route might be good for you is to go through everything in detail with one of our advisors at Oportfolio mortgages. This option works well for large mortgage loans.
A mortgage lender will potentially allow a borrower to put part of their loan on interest only and half on capital repayment. Meaning that you would only pay the interest per month on one part of the loan (and not actually pay back the loan) and then pay the capital of the other part of the mortgage back to the lender. Let’s have a look at an example of how this might work.
Part Interest Only Part Repayment Mortgage
Say a borrower needs a £1,000,000 mortgage over 30 years. The best interest rate for their circumstances would be 4.5%. That would work out to £5,079 per month. The borrowers had budgeted for around £4,000 a month, so the extra £5,000 would be too much for them to comfortably afford. After discussing options with their mortgage advisor, the borrower has decided to take a £700,000 on an interest only basis which would mean that the payments on this part of the loan would be £2,625.
They then decided that they would take the remaining £300,000 on a repayment basis. That would work out to £1,520 per month. So in total, the payments for both parts of the loan would work out to £4,145. A much more manageable amount for the borrowers. If this was still a little too high for the borrowers, they also could have the option of taking the loan out over 35 or 40 years which means the total payments could be between £3,974 and £4,045.
Again, this doesn’t mean that the borrowers have to keep a £700,000 interest only mortgage and a £300,000 repayment mortgage for the entire mortgage term. Every 2-5 years their mortgage advisor will help them to re-structure and remortgage their property to make sure that they are paying a manageable amount per month and are actually paying down their mortgage loan.
Speak To A Mortgage Advisor If Your Mortgage Payments Are Too High
If you are thinking that your new mortgage payments might be too much for you to manage, don’t sit alone and worry. Give us a call today at Oportfolio Mortgages. It doesn’t matter if we haven’t helped you secure a mortgage before, we are here to help anyone who needs guidance. Our qualified and experienced mortgage advisors will be able to go through all your options with you and help you to make the right decisions when it comes to re-structuring your mortgage. Call us today for a free initial mortgage consultation.