The last few months have been tough, there’s no question about that. The rising cost of living in the UK has meant that the average person is now paying more for utilities like gas, water, and electricity. Food and drink prices have soared, and petrol and diesel now cost between £1.50 and £1.80 a litre. Additionally, mortgage interest rates have quadrupled in many cases. Unfortunately, we can’t do much about utility bills and petrol, but we can potentially help with mortgage payments. We don’t want to see anyone struggling to pay their debts. So, what can be done if your payments are too high for you to handle? In this blog, we are going to answer some of the internet’s most common questions around reducing home finance payments.
Struggling to Afford Mortgage Payments
If you are finding your mortgage too much 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 starting to release sub-4% rates. All indications point towards interest rates settling between 3 and 4% within the next year when the Bank of England brings the base rate down, which is great news. However, after years of enjoying manageable 1-2% rates, many borrowers will soon face higher rates they can’t comfortably afford.
Extending Your Mortgage Term to Reduce Payments
One way to reduce your mortgage payment is by extending your mortgage term when it comes to remortgaging. The longer you take to repay the mortgage, the lower your monthly payments will be. Most mortgage lenders allow you to take a mortgage up until retirement age, which is often estimated at 70 years old, and some may extend it to 75 or later if you use pension income projections.
For instance, a borrower with a £300,000 mortgage over 25 years at 2% would pay around £1,272 a month. With the rate increasing to 5%, payments would rise to £1,754 a month. By extending the mortgage term to 35 or even 40 years, payments could reduce to £1,514 or £1,447 per month, respectively. Although this would still be higher than before, it’s much less than keeping the 25-year term.
Extending the mortgage term doesn’t mean you have to keep it for 35 or 40 years. Most people remortgage or switch products every 2-5 years, and as rates come down, you could remortgage to a lower rate and decrease your mortgage term when it’s more manageable.
Does Overpaying Mortgage Reduce Monthly Payments?
Overpaying your mortgage can reduce the overall interest paid and the loan term, but it doesn’t typically reduce your monthly payments immediately. Instead, it shortens the length of the mortgage, leading to interest savings over time. However, some lenders might allow you to recalculate your monthly payments based on the reduced balance, potentially lowering your monthly payment.
Does Paying Down Mortgage Reduce Payments?
Paying down your mortgage can reduce the total interest paid and might shorten the mortgage term. However, it usually does not lower your monthly payments unless your lender allows you to recalculate the payments based on the reduced principal. This option depends on the terms of your mortgage agreement.
Reducing Payments Without Refinancing
If you’re looking to reduce mortgage payments without refinancing, you might consider switching part of your mortgage to an interest-only payment plan. This option is subject to strict affordability criteria and typically requires a minimum income and a certain level of equity in your property.
Part Interest Only, Part Repayment Mortgage
A mixed mortgage approach can also help reduce payments. For example, with a £1,000,000 mortgage over 30 years at 4.5%, you’d pay £5,079 per month. If your budget is £4,000 a month, putting £700,000 on an interest-only basis would mean paying £2,625 per month for that portion. The remaining £300,000 on a repayment basis would be £1,520 per month, totalling £4,145 per month. Extending the term to 35 or 40 years could reduce this further.
This doesn’t mean you’ll have an interest-only mortgage for the entire term. Every 2-5 years, your mortgage advisor can help restructure and remortgage your property to ensure manageable payments and loan reduction.
How Can I Lower My Monthly Mortgage Payment Without Refinancing?
If you’re wondering how to lower your monthly mortgage payment without refinancing, you have several options. Besides extending your mortgage term or switching to part interest-only payments, you could also make a lump sum payment to reduce your principal. While this typically doesn’t lower your monthly payments immediately, it reduces the principal amount, leading to lower interest charges and potentially shorter mortgage terms. Over time, this can make your monthly payments more manageable.
Mortgage Overpayment: Reduce Term or Payments?
When you make an overpayment on your mortgage, you might wonder whether it’s better to reduce the term or the monthly payments. Overpaying your mortgage can either shorten the term or reduce your monthly payments, depending on your lender’s policy. Reducing the term means you’ll pay off the mortgage faster, saving on interest in the long run. On the other hand, reducing monthly payments can immediately ease your financial burden, making it easier to manage your budget.
Is It Better to Reduce Mortgage Term or Monthly Payments?
Deciding whether to reduce the mortgage term or monthly payments depends on your financial goals and situation. Reducing the term saves more on interest and helps you become mortgage-free sooner, but it might not lower your immediate financial burden. Lowering your monthly payments can provide immediate relief and improve cash flow, but it might result in paying more interest over the life of the loan. Consulting with a mortgage advisor can help you decide which option best suits your needs.
Does Paying a Lump Sum Off Mortgage Reduce Monthly Payments?
Paying a lump sum off your mortgage can reduce your monthly payments, depending on your lender’s policies. Some lenders allow recalculating monthly payments based on the reduced principal, which can lower your monthly payments. However, other lenders might apply the lump sum towards reducing the loan term. It’s essential to check with your lender and understand how they handle lump-sum payments.
Ways to Reduce Monthly Mortgage Payments
As already mentioned in previous point in the blog, there are several ways to reduce monthly payments, making it easier to manage your finances. These include:
- Extending the Mortgage Term: Lengthening your mortgage term spreads the payments over a longer period, reducing the amount you need to pay each month.
- Switching to Interest-Only Payments: If eligible, you can switch part of your mortgage to interest-only payments, significantly lowering your monthly payments.
- Making Overpayments: While overpayments don’t immediately reduce monthly payments, they reduce the principal and interest over time, potentially leading to lower payments in the future.
- Making a Lump Sum Payment: This reduces the principal amount, and if your lender allows, can lead to lower monthly payments.
- Seeking Professional Advice: A mortgage advisor can help you explore all options and choose the best strategy to lower your monthly payments.
Best Way To Reduce Mortgage Payments
Reducing your mortgage commitment per month is not only about easing your financial burden but also about making strategic decisions that align with your long-term financial goals. Whether you’re struggling with high payments or simply looking to save money in the long run, understanding your options is crucial.
Extending your mortgage term can provide immediate relief by lowering your monthly payments, though it may mean paying more interest over the life of the loan. Switching part of your mortgage to interest-only payments can significantly reduce monthly costs, but it’s essential to consider the long-term implications and whether this strategy aligns with your financial goals. Overpaying your mortgage, making lump sum payments, or considering mortgage recasting are also viable options to explore.
Speak to a Mortgage Advisor If Your Payments Are Too High
If you think your new payments on your mortgage might be too much to manage, don’t worry alone. Contact us at Oportfolio Mortgages. Even if we haven’t helped you secure a mortgage before, we’re here to assist anyone needing guidance. Our qualified and experienced mortgage advisors will go through all your options and help you make the right decisions for restructuring your mortgage. By considering these strategies, you can reduce your payments and make them more manageable. Whether it’s extending your mortgage term, switching to part interest-only, or seeking advice from a mortgage advisor, there are ways to lower your monthly payments and reduce financial stress. Call us today for a free initial mortgage consultation.
