What to do if you can’t pay your mortgage due to rising interest rates

If you got a term mortgage before December of last year, you may be breathing a little easier than your friends or family who have variable rates or recently had to remortgage with a new deal.

In December, a two-year fixed mortgage had an average interest rate of 2.34 percent, but it has now shot up to 4.81 percent, according to Money Facts.

And rates are expected to rise further as lenders and the Bank of England grapple with their response to Chancellor Kwasi Kwarteng’s ‘mini-budget’ on Friday.

The mortgage rate increases come amid the cost of living crisis, as food and fuel costs rise and put pressure on household finances.

The mortgage rate increases come amid the cost of living crisis, as food and fuel costs rise and put pressure on household finances.

That introduced tax cuts across the board, spooking markets and sending the cost of government borrowing skyrocketing.

In addition, the Bank of England raised its base rate further last week by 0.5 percent, taking it to 2.25 percent as lenders moved to incorporate the hike into their new fixed-rate mortgages.

This is bad news for mortgage holders. As the cost of borrowing rises, it becomes more expensive for lenders to manage the risk they take in offering mortgages, and as a result, they increase the cost to borrowers.

Borrowers with tracker mortgages that follow the base rate will see another increase in their monthly costs, while those with standard variable rates will also see increased costs as lenders pass on the increase.

Most expect rates to continue rising next year, with some forecasting a base rate increase to 5.8 percent.

While the lenders’ stress tests mean that borrowers who took out mortgages since 2014 should be able to afford interest rates as high as 7 percent, these tests don’t take into account broader economic pressures, such as rising inflation, that affects general household budgets.

In August, inflation hit 9.9 percent, far short of the Bank of England’s target of 2 percent, buoyed by energy and food prices.

Variable-rate borrowers are more exposed to increases than fixed-rate borrowers, since the latter will only be affected when re-mortgaging

Variable-rate borrowers are more exposed to increases than fixed-rate borrowers, since the latter will only be affected when re-mortgaging

Variable-rate borrowers are more exposed to increases than fixed-rate borrowers, since the latter will only be affected when re-mortgaging

Mortgage arrears hit a 12-year high of £2.05bn at the end of the first quarter of 2022, the highest figure since June 2010 when arrears hit £2.09bn, according to data from the Bank of England. and the Financial Conduct Authority.

Homeowners should continue to make their mortgage payments at their current level if possible. However, the unprecedented nature of current rate increases and inflation may mean that some may no longer be able to do so.

Talk to your mortgage lender early on

“If you’re behind on payments or facing difficulties, then the best advice is to talk to your lender,” says Nick Mendes, mortgage technical manager at John Charcol.

‘Family [budget] pressures are mounting like never before and mortgage rates are also rising. It’s a double whammy.

The advice to clients from the Financial Conduct Authority is that if a client is in default (meaning they have not made their mortgage payments) or is at risk of default, they should speak to their mortgage provider as soon as possible. .

They will review the client’s budget with them to get the best idea of ​​the available options.

It’s also worth checking your insurance policies as some include mortgage coverage under certain circumstances.

There are several ways to lower monthly payments in the short term, though most will mean the mortgage will end up costing more in the long run.

Switch to an interest only mortgage

The first option to lower your costs might be to temporarily switch from a pay-and-interest mortgage to an interest-only option.

This effectively stops your outstanding mortgage at its current level. The borrower will stop paying the loan balance and instead pay only the interest that accrues each month.

“The interest will only reduce the monthly payment, which could provide valuable breathing room,” explains David Hollingworth of mortgage broker L&C.

However, this move should be treated as temporary. The borrower will have less time to pay off the mortgage balance once it switches back, and will have to pay more interest each month to make up for lost time.

The greatest danger is if the mortgage is never changed back into payment. This could become a big problem if you reach the end of the term without any way to repay the mortgage balance.

Borrowers in this situation are often forced to sell their home to pay off the bank.

Apply for a mortgage payment waiver or reduction

The second option is to ask your lender for a mortgage payment suspension, also known as a deferment. This allows a homeowner to temporarily suspend or reduce their monthly mortgage payments.

Some borrowers struggling financially during the pandemic used payment holidays, as banks were required to offer them to any customer who sought them.

In the first three months after the scheme was launched, one in six mortgages was subject to payment deferment, with a typical suspended payment totaling £755 per month.

Banks are no longer required to offer payment holidays to borrowers, but those who are struggling can talk to them and request one. Lenders likely want borrowers to maintain a certain level of payment each month, rather than stop altogether.

Bank of England research shows mortgage borrowers with deferred payments during the pandemic were less likely to cut spending elsewhere.

Warning: Lowering your mortgage payments in the short term will generally increase the total amount you owe.

Warning: Lowering your mortgage payments in the short term will generally increase the total amount you owe.

Warning: Lowering your mortgage payments in the short term will generally increase the total amount you owe.

Again, it is important to remember that the payments will be more expensive once the holidays are over, in order to pay the mortgage at the end of the term. The additional accrued interest will be added to the outstanding mortgage.

Mendes said: ‘You have to take into account the higher payment cost in general. You can defer payment or lower your monthly payment, but within six months your payment will have increased.

Extend the duration of your mortgage

A third option is to extend the length of your mortgage to spread payments over a longer period of time. For example, you could extend a 25-year mortgage for an additional five years to make it a 30-year term.

For those with a fixed deal, this usually needs to be done at the time of the remortgage. Banks don’t typically offer mortgages longer than 40 years, and often won’t extend your mortgage if it means you’ll still pay it off until retirement or after a certain age.

Again, this will help reduce the amount of each monthly payment, by restructuring the mortgage to a longer term, but will cost more in terms of interest payments.

However, unlike an interest-only option, it means that the mortgage will eventually be paid off, even if the term never comes down to the original term.

Mortgage interest support regime

In addition to direct solutions with your lender, the Government runs the Mortgage Interest Support scheme that lends money to low-income people to help them meet their mortgage payments.

The scheme offers low-interest loans from the Department for Work and Pensions to help pay for the interest element of a mortgage. They cannot be used to pay the balance.

It is only available to homeowners who already receive support from government benefits, such as income support, the income-based job search subsidy, or the pension credit.

The money received through the scheme is a loan, not a benefit, meaning it is added to the amount outstanding on your home.

There are also services like Citizen Council Y money helper who provide free, independent advice on financial matters and can discuss options with you.

For those who think they will struggle with long-term mortgage payments, another option is to consider selling the house, perhaps moving to a smaller property with cheaper mortgage payments.

This is more realistic for those who have substantial equity in their home, which they could use as a deposit for another property or even purchase one outright.

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