Interest rates are set to go up yet again, after the Bank of England pushed up base rate this afternoon to the highest level seen for 15 years.
If you’re a mortgage borrower, this is going to hurt, whether right now or in future.
I can’t get my head round the Bank of England pushing up base rate to shrink inflation.
It feels like using a sledgehammer to inflict immense pain on a small part of the population.
Soaring interest rates hit mortgage holders hardest. Yet only 28% of UK properties are owned with mortgages or loans, according to the Office for National Statistics. The rest are wholly owned (36%) or rented, whether privately or as social housing.
Of those with mortgages, 75% are on fixed rate deals. So only 7% of UK properties have variable rate loans, and feel the immediate impact of recent rate rises. Homebuyers also struggle with the stress of seeing rates rises, and deals disappearing from the market.
Anyone on a fixed rate mortgage faces a ticking time bomb – waiting to see how much their payments will go up when their current deal ends. Loads of people who took out cheap two-year fixed-rate mortgages at under 2% now face mortgage deals fixed around 6%, which will add hundreds if not thousands of pounds to their monthly payments. When I was discussing the topic on Radio 5 Live this morning, a caller was looking at an increase of £600 a month on her mortgage bills – that’s £7,200 a year more to scrape together from taxed income. It’s even harder to find the extra cash when so many other bills, particularly for food, fuel and energy, have shot up at the same time.
Here are seven ways to cut your mortgage payments, if you’re facing rising bills:
1. Extend the length of your loan
Traditionally, mortgages ran for 25 years, so they were done and dusted well before retirement.
But if you borrow for longer, it will bring your monthly payments down (phew).
However, it will also mean you pay more interest in total, over the longer time frame.
It could also be a problem if you’re stuck working until later in life, so you can afford your mortgage. This week, Halifax, Britain’s biggest mortgage lender, extended the maximum working age it will consider for mortgages to 75 – well after people start drawing their state pensions. Working well into your 70s is a pretty bleak prospect for anyone who doesn’t completely love their job.
2. Switch temporarily to interest only
Moving from a repayment mortgage to an interest-only loan will definitely bring your monthly payments down – because you’re only paying the interest, not chipping anything off the original purchase price of your property.
It can tide you over tough times, but don’t stick your head in the sand. Switch back to a repayment loan as soon as you can afford to, or come up with rock solid plan on how to pay off the remaining balance. Otherwise, you could get to the end of your mortgage term still owing loads of money, and be forced to sell the roof over your head.
3. Overpay your mortgage
While you can afford it, chucking extra money at your mortgage will lower future payments in two ways.
First, if you owe less, you’ll pay less interest. Second, if you owe less money compared to what your property is worth (known as the ‘loan to value’) you may qualify for lower mortgage rates.
Best Buy rates are typically only available when borrowing less than 70% or 75% of the property value. It’s definitely worth checking if the combination of rising house prices and overpayments could push your loan to value into the realm of cheaper deals.
Try upping your payments right now, to the expected level on a new deal. If you get a pay rise, increase your mortgage payments before you get used to spending the extra cash. Just before remortgaging, chuck any savings, bonuses or inheritance into bringing down your balance. As a general rule, if you earn less interest on your savings than you pay on borrowing, it makes sense to use savings to pay down loans. Just make sure you hang onto some emergency savings, ideally three to six months of living expenses.
4. Use a mortgage broker
When money is tight, it’s particularly worth using a mortgage broker to find a loan, rather than just rocking up at your local bank.
Mortgage brokers have access to loans which aren’t available to ordinary people. They will crunch all the numbers for you, comparing interest rates, fees and freebies such as free valuations to find the best deal.
A good broker will be familiar with which lenders are more likely to approve a loan if for example you’re self-employed or don’t have a perfect credit history. You can even find fee-free mortgage brokers such as L&C, where you won’t have to pay for the privilege, as they stick to commission from the mortgage lenders.
5. Give your finances a makeover
Now, more than ever before, it’s worth making yourself into a model borrower.
Check your credit records well before trying to arrange a mortgage, rather than leaving it to the last minute. You can check your credit report with the three major credit agencies for free using Clearscore for Equifax, the MoneySavingExpert Credit Club for Experian and Credit Karma for TransUnion. That way, if you discover any mistakes or issues, you’ve still got time to get them sorted out.
Get yourself on the electoral roll. Don’t apply for credit in the 3 to 6 months before applying for a mortgage, as this can lower your credit score – so no new current accounts, credit cards, or personal loans, especially payday loans. If you do have credit card balances, try to pay them down, and avoid going into your overdraft.
Then work on squeezing down any expenditure, to show you can afford higher mortgage payments. Check out my post on How to slash your budget to the bone for inspiration.
6. Move house
If money is so tight that you just can’t afford your mortgage payments, it may be time for really big decisions. Selling up and moving to a cheaper property, whether somewhere smaller nearby, or somewhere with lower house prices, can make your mortgage more manageable.
As someone who moved from London to Suffolk to improve our finances and clear our mortgage, I’m not trying to downplay the hassle and expense. It can be a massive wrench, if jobs, schools, family and friends are affected. But it might be worth it, if it stops financial nightmares.
7. Seek help
Whatever else you do, don’t skip mortgage payments without talking to your lender. That can really mess up your credit history, and chances of borrowing in future. Your lender may be able to offer alternatives such as payment holidays, in addition to options above such as extending your term or switching to an interest only loan. It can also be well worth talking to one of the not-for-profit debt help charities, such as StepChange, Citizens Advice, CAP or National Debtline. They may be able to negotiate with your creditors on your behalf.
Now – over to you. Are you affected by the interest rate rises? If you have a mortgage, how are you coping?