The UK finds itself in a very strange situation currently. High inflation levels has meant that the Bank of England has now (at the time of writing this article) raised the base rate for the 13th time in a row. This has had a knock-on effect on the UK economy and most of us now see things costing much more than they did a year ago. One of these things costing more money is mortgages. In the past year and especially in the last few months, mortgage interest rates have gone up from potentially below 1% to now over 6% on average. Meaning that thousands of borrowers coming off their 2 or 5 year fixed rate products will soon be faced with interest rate increases of 5% or more. And unfortunately many people will also be faced with the prospect of being unable to afford their new loans and potentially losing their properties. However, there are certain ideas floating around the ether that could potentially help borrowers to cope for longer. One of these potential ideas is the introduction of a six month interest only mortgage.
What Is an Interest Only Mortgage?
Most residential mortgage loans (mortgages on properties that you want to live in) are arranged on a capital repayment and interest basis. This means that per month you will pay off part of your outstanding loan balance and also interest that has been incurred on the loan. For example, if you had a £200,000 mortgage that you were paying back over 25 years, the capital of the loan that you would need to pay back per month would be around £666.66. The lender would then charge interest on the loan too. If we took an average interest rate currently of around 6%, this would mean that your total monthly payment for this loan would be £1,289.
Aside from a repayment mortgage, you can also choose to have your mortgage on just interest only. This means that you will not actually pay off any of your mortgage per month, you will only pay the interest that is charged on the loan. So for example, if we used the exact same figures as before but we just used the interest only element, this would only cost you £1,000 per month, saving you almost £300 a month.
Standard interest only loans come with both positives and negatives. The main positive being that your mortgage payments are reduced. One of the two main negatives to interest only mortgages is that you won’t pay any of your mortgage off, so at the end of your payment period, you will still owe the bank the mortgage. The other negative is that generally criteria for getting an interest only mortgage is quite strict. You often need to be earning a large income (£70K or more) and will often need to put down a large deposit or have a large amount of equity in your home.
Six Month Interest Only Mortgage
As interest rates increase, both lenders and the UK government have been trying to come up with ways in which they can help ease the pressure and stress of rising property costs. One of these ways that has been discussed is by introducing six month interest only mortgage products. The idea being that borrowers can switch their capital repayment loans to interest only products for six months if they are finding it difficult to keep up with their regular mortgage loan.
It is important to make it clear that this is currently (as of the 26th of June 2023) a recent idea that is being discussed and not something that has been officially implemented by lenders yet. The Chancellor of the Exchequer Jeremy Hunt is very involved in these discussions with banks and is currently working with the lenders to offer borrowers some mortgage strain relief.
Some other discussions have been had around potentially allowing borrowers to extend their mortgage terms to make mortgage payments more manageable. How this could look potentially is not exactly clear right now, as lenders are notoriously quite strict on the length of time they will allow borrowers to take a mortgage for. Typically you are able to take a mortgage until retirement ago on employed or self employed income alone, and depending on your age when you take the mortgage, you can potentially take a loan for a maximum of 40 years. The new proposed change could mean that borrowers could take loans for longer than 40 years, or perhaps past retirement age, or perhaps it just means that borrowers with 20 year loans can change their loans to 30 years for example, with more ease. We will have to wait and see if there is any momentum around this in the future.
The Chancellor’s Comments
Commenting on the public’s mortgage struggles, Jeremy Hunt has said:
There are two groups of people that we are particularly worried about. The first are people who are at real risk of losing their homes because they fall behind in their mortgage payments. And the second are people who are having to change their mortgage because their fixed rate comes to an end, and they’re worried about the impact on their family finances of higher mortgage rates.
“So today I agreed with the banks and the principal mortgage lenders and the Financial Conduct Authority three very important things. The first is that absolutely anyone can talk to their bank or their mortgage lender and it will have no impact whatsoever on their credit score. The second is that 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. That gives people a powerful new tool for managing their monthly budgets – and it will begin taking effect within the next two weeks.
And finally for people who are at risk of losing their home in that extreme situation, the banks and mortgage lenders have a number of things in place. The last thing that they want to do to repossess a home, but in that extreme situation they have agreed there will be a minimum 12 month period before there’s a repossession without consent. These measures should offer comfort to those who are anxious about high interest rates and support for those who do get into difficulty.”
If Your Mortgage Payments Are Too High, Speak With a Mortgage Advisor
The potential six month interest only mortgage ideas has not been officially confirmed yet, but it may be something that we see coming in to effect soon. Our advice currently is to speak to a qualified adviser about your options before doing anything. The best thing to do if you are struggling with mortgage payments or high interest rates, is always to speak with a mortgage advisor first. Taking a six month interest only mortgage could have some serious repercussions when it comes to getting a new mortgage in the future. A mortgage advisor is a professional who knows everything you need to know about the mortgage market, all the schemes available, the niche criteria, and most importantly how to get you the best mortgage product for your circumstances. Call our team of expert mortgage professionals at Oportfolio today for a free initial mortgage consultation. We are here to help.