Anyone who is coming to the end of their current mortgage deal will know that the environment for rates is looking very different to what it was just two years ago.
Rising inflation has led the Bank of England to raise its base rate to a 14-year high of 4 per cent, which, in turn, has led to significantly higher mortgage rates for most homeowners. Another hike is expected this week when the Bank’s rate setters announce their latest decision on March 23.
The Office for National Statistics (ONS) said that around 1.4 million households in the UK are facing the prospect of rate increases when they renew their fixed rate mortgages this year, the majority of whom had been paying at rates below two per cent. Once those on variable deals are included, some 4 million households are facing increased costs.
This is resulting in thousands of pounds more in annual costs for mortgage holders across the UK.
The ONS said the average cost of a five-year fixed mortgage deal for a semi-detached home in the UK increased by an average £481 a month in December 2022 compared to December 2021, resulting in nearly £6,000 more a year. This was alongside a £771 monthly increase for detached homes, a £397 increase for terraced houses, and a £363 rise for flats and maisonettes.
Average mortgage repayments have increased by 27 per cent for borrowers whose deals ended between September and February, according to separate data from the mortgage broker London Money while monthly repayments are also up £317.50 a month on a loan of about £325,000, it found.
Yet while finances are likely to be squeezed there are a number of ways to help with that increased burden. Here are some tips to help deal with rising mortgage costs.
Speak to your mortgage broker about the best deal for you
Anyone who is nine to six months away from their current mortgage deal maturing should speak to a broker now, allowing ample time to find the best product. Brokers can then lock in the best rate, but are able to resubmit an application if a cheaper deal becomes available between now and the new mortgage agreement starting.
“It’s never too early to start looking”, Mark Harris, chief executive of mortgage broker SPF Private Clients, said. “You’re then protected against worsening rates while knowing that you’ve still got that flexibility almost right up to the point when you’re about to come off your current product.”
A broker will also be able to advise whether a two-year fix, five-year fix or variable deal is best for the customer, alongside whether a building society loan may be better suited to someone’s needs than a high street lender.
Nicholas Mendes, mortgage technical manager at John Charcol, said many customers are choosing a five-year fix. It is slightly cheaper than the two-year option but also protects against any changes that might arise from events such as a general election next year.
“Now more than ever people are saying ‘I need stability in my monthly payments, especially when other things are changing like utility bills, and if I can fix where I feel comfortable then that’s the path I want to take’,” Mendes said.
Others, however, are eyeing up two-year deals in the knowledge that mortgage rates are likely to come down a little over the next two years and they can start a five-year fix at a lower rate in 2025, according to Harris.
Paula Higgins at the HomeOwners Alliance, a property advice website, said mortgage holders who are worried about paying their current monthly payments should speak to their lender. “They usually have a specialist support team who can help you find a solution”, she said. “Arm yourself with your mortgage account number, outstanding debt and an explanation for why you are worried about your repayments and give them a call.”
Extend your mortgage term
“A big discussion we are having with clients at the moment is extending the term of their mortgage”, Andrew Milnes, Mortgage Adviser at MAB Bingley, said.
While the prospect of being chained to a mortgage for a longer period of your life may seem depressing, brokers say it can lessen the financial burden in the short term.
A homeowner who bought their property with a 25-year mortgage on a two-year fixed rate of 2 per cent will now be facing a new deal of around 4 per cent. This means their payments may be moving from £600 to £800 a month because of the rate rise and lower term.
“But if you extend that term back to 25 years or even 30 years, that has the impact of putting your payment back to a level you feel comfortable with”, Milnes said.
He added that this deal can be renegotiated again if rates fall in a few years’ time. “That could mean we can just keep your payment at that same level and I might be able to shave a couple of years back off your mortgage,” Milnes said.
Cut your daily spending habits
It may seem like buying that morning coffee barely makes a dent in your budget, but it is these spending habits which brokers and lenders will analyse to see what could be directed towards mortgage payments.
“We’ll look at your bank statements and see if there can be a bit of a refocus we can do on your expenditure,” Milnes said. “It’s the little things people don’t notice, like the tap of the card at the Costa on the way to work. Or you’d be amazed how many people are duplicating things, such as having three Netflix accounts in the same house.”
The HomeOwners Alliance advises shopping online to help plan your meals and avoid mindlessly putting items in the trolley, alongside selling any gadgets, furniture and clothing you no longer need. It is also wise to create a monthly budget, based on your last six months of bank statements, to calculate all the money coming into your household, and all the bills and outgoings you must pay every month. Citizens Advice has a budgeting tool that can help with this.
Take in a lodger or let out your home on AirBnB
If you have a spare room, taking in a lodger could help with a rise in mortgage costs. The government’s “Rent a Room Scheme” lets you earn up to £7,500 a year (£144 a week) from a lodger without having to pay tax. Most mortgage agreements allow the homeowner to take in a lodger, but it is important to check with your lender first. A lodger is also sometimes counted as extra income when a mortgage application is being made, potentially allowing for a larger loan.
Mendes said a number of clients are also letting their home out on Airbnb to help pay the bills. “I’m definitely seeing more clients looking at letting out the property on Airbnb for short periods such as one or two nights. If they live somewhere like London or by the coast, they could even let it out for a week and do something like move in with their parents during that time.”
Ask for a pay rise
It may seem a daunting prospect to ask for a pay rise at a time of rising costs for businesses, but with energy, food and petrol prices rising, you will not be the only one looking for a salary increase.
Beckie Sizer, HR Director at the recruitment and jobs site Reed, said it is important to have a good knowledge of the current market rate for your role. Reed has a tool on its mobile app displaying the average salary of any searched job, alongside the ‘lowest’ and ‘highest’ salaries for the role. She added that it is important to come “prepared with a clear idea of what salary you want and use that as your benchmark when negotiating.”
It is also essential to prepare a case for why you deserve a raise, so gather evidence and examples of achievements at work that you can summarise. Try to also make the pay rise request face-to-face as this is harder to turn down than one made over email.
Ask your lender about an interest-only mortgage or consolidating your debt
Interest-only mortgages are usually frowned upon by lenders for residential mortgages as the debt does not get repaid at all, but it can be considered for those who are struggling to otherwise pay their bills.
The monthly payment will just cover the interest charges on your mortgage, not any of the actual amount that was borrowed, with the lump sum still needing to be paid back at the end.
“It isn’t an option that should be considered lightly”, Mendes said. Lenders will need to know what the repayment vehicle is to pay the lump sum, which might need to be your home.
Homeowners struggling with their mortgage costs could also check if there are other big monthly debts that could be consolidated into their mortgage. This involves releasing equity from your home to pay a bigger mortgage while retaining the same monthly cost. Harris said a broker might consider this as an option if someone has a large credit card bill that is charging high interest fees. This does mean paying a mortgage for longer however.