With the Bank of England’s base rate increasing once again and inflation remaining stubbornly high in the UK, mortgage rates have been rising steadily in recent weeks. 2023 is also a significant year for mortgage fixed terms ceasing, with a large amount of fixed rates coming to the end of their deal period, causing clients needing to remortgage.
This is seeing ‘payment shocks’ as clients are moving from fixed rates in the 1% and 2% brackets on the back of record low interest and mortgage rates of recent years, onto current mortgage rates of 5% and above.
With clients keen to save money where possible, especially with interest and monthly payments rising, we are seeing an increase in clients looking to manage these increases in mortgage rates and monthly payments, and to minimise the payment shock as much as possible. We have also seen the government confirm that they intend to enforce lenders to make it easier to extend your mortgage term of temporarily revert to interest only as your mortgage repayment type, with further details on this to follow in the coming days. Here our Chief Operating Officer Greg Cunnington is here to offer some alterative solutions to help you reduce your monthly payments, and to explain some of the benefits and negative considerations of these options. Here are 3 suggestions to consider.
An Interest Only Mortgage
An interest only mortgage is where you only pay the interest on the mortgage balance via your monthly payments. As such, the monthly payments are significantly lower than on a capital repayment mortgage.
The down side is that your mortgage balance is not reducing via the monthly payments, meaning that you are not paying the mortgage down. You will also pay more interest over the lifetime of the mortgage. However, there are various client circumstances where an interest only mortgage can be a great option.
Clients with irregular income can often prefer an interest only mortgage, opting to pay the mortgage down via regular lump sums. This is often used by clients who receive large bonus income, or by self employed clients with irregular income receipt over the year. Interest only mortgages can also be a good option for clients that intend to sell and downsize from their property within the mortgage term that already have sufficient equity in their property for their downsize plans, or clients with background properties that they intend to sell to repay their mortgage.
There has also been an increase in lenders that allow clients to set up their mortgage on a ‘part and part’ basis – whereby part of the mortgage is on a capital repayment basis, and part on an interest only mortgage. This can assist clients to lower their monthly payments but also retain an element of the mortgage to be on a capital repayment basis.
Lenders criteria can be stricter to obtain an interest only mortgage, and they will only be suitable for clients with suitable repayment vehicles and plans in place, so it is important that you receive advice and speak to an intermediary before looking to alter your repayment type.
An offset mortgage
An offset mortgage is a mortgage that allows you to connect your savings with your mortgage account. By doing so, the money you have in these linked accounts helps to offset the outstanding balance on your mortgage, which can lead to reduced interest charges.
There are a few features to consider in relation to offset mortgages:
This is your outstanding mortgage balance. Each month, you make payments towards the mortgage loan amount. This payment includes the interest on the net balance between this mortgage account and the offset savings account that is linked.
Offset savings account
In addition to your mortgage account, you’ll need to have a savings or current account with the same bank or lender providing your mortgage. This account will then be connected to your mortgage and the balances are taken into consideration and may be used to pay down the mortgage or you can use it to only make monthly payments on the net balance between your mortgage account and your offset savings account.
For this offset mortgage product, you pay interest on the reduced loan amount of the difference between the outstanding mortgage balance and the balance in your offset savings account.
Reduced interest payments
By linking your savings to your mortgage, you’ll effectively lower the interest charged on the loan. In certain instances, this may reduce the total interest you’ll pay over the loan term.
Access to funds
This offset mortgage product links your savings to your mortgage balance, but you’ll still have access to your savings should you need it. With access to funds, you can deposit or withdraw funds from the linked accounts as needed, providing you with greater flexibility. This feature is often very attractive to clients that use offset mortgages.
Extending the mortgage term
Traditionally, clients would assume to take out a mortgage with a 25-year mortgage term. This means that they repay the loan over 25 years. However, you could pick a mortgage term anywhere from 5 years up to 40 years, depending on the lender and your affordability criteria. By extending the term of the loan, you can reduce your monthly repayments because you’re repaying the loan over a longer period. However, you may be charged more interest in the long term, because you’re borrowing money for longer, so need to take this into account
We are seeing an increase in clients looking to extend their mortgage term in light of higher mortgage rates, to help minimise the monthly payments. We have also seen a rise in longer mortgage terms for first time buyers to ensure they have some funds left over on a monthly basis to assist with furnishings etc, and in fact it has become more common for a first time buyer now to take a 35 year mortgage term than a 25 year mortgage term.
Your ability to be able to extend the mortgage term will be determined by your age, your intended retirement age, and the lenders criteria in relation to retirement ages (for example some lenders will assume you will retire at state retirement age and so cap the mortgage term on this basis, whilst some can be more flexible and for non-manual job roles can take things to age 75 if this is your stated intention and sense checks with your line of work). Again it is important that you speak to an intermediary and obtain whole of market advice if you are considering extending your mortgage term.
At LDN Finance we understand that it’s an uncomfortable time for many who are faced with increased outgoings over the coming months. However, speaking to a mortgage adviser can help. By working through your affordability and exploring available mortgage options, you may find the solution to not be as scary as you thought. Keen to get in touch? Call our experts on 020 3903 9875 or use our online contact form HERE.