To combat persistent inflation, the Bank of England (BoE) has raised the base interest rate 14 times since December 2021. As of September 2023, the rate is 5.25%—the highest in 15 years. Consequently, millions of homeowners are finding it challenging to manage their mortgage repayments.
If your fixed-rate mortgage deal is ending, you might face an increase from an interest rate of less than 2% to more than double that amount. The rate you can secure will vary based on your specific circumstances, but the current best-available rates are around 5%.
In response, the government introduced a new Mortgage Charter in June 2023 to support UK mortgage holders.
Key Measures of the Mortgage Charter
- Support from Lenders: Concerned customers can contact their lender for support without affecting their credit score.
- Fixed-Rate Deals: Secure a new fixed-rate deal up to six months before your current agreement ends, and pursue new agreements up to your remortgage date.
- Mortgage Options: Some customers can switch to an interest-only mortgage or extend their mortgage term without a new affordability check, and neither option will impact their credit score.
- Affordability Check Waivers: Some mortgage holders may be able to remortgage without an affordability check, this could help to ensure you are able to get the mortgage that is the right mortgage for you when your term ends, without worrying about current financial standings. It may mean you don’t need to worry about how your decision now could influence any future borrowing.
- Repossession Protection: Customers won’t face repossession of their homes until 12 months after their first missed payment, providing peace of mind during short-term financial struggles.
If you’re struggling with higher mortgage repayments, you might want to consider these practical suggestions to reduce stress:
Scrutinise Your Household Budget
Examine your monthly expenses closely to identify possible savings. Redirecting these savings towards your mortgage can make it easier to manage increased repayments.
Claim any protection insurance you have
If you’re struggling to cover costs due to injury or sickness, you may have insurance that can help supplement your income. Mortgage payment protection, while not mandatory, can provide support if you’re unable to work due to an accident, illness, or redundancy. Similarly, income protection insurance pays a set amount if you can’t work due to sickness or injury until you recover or retire.
Utilise the mortgage charter and Switch to Interest-Only payments for six months
Most people have a repayment mortgage where they pay off both the capital and interest each month. The Mortgage Charter allows switching to an interest-only mortgage for up to six months, making costs more manageable temporarily. After this period, your normal repayment schedule will resume.
Extend Your Mortgage Term
Extending your mortgage term can spread the cost of repayments. For instance, adding five years to your term can reduce monthly capital repayments. You can extend your term within the lender’s maximum allowed term and as long as it doesn’t exceed your expected retirement age. Beware though, while extending your mortgage over a longer term may help you benefit from a lower monthly payment, over the long term, you’ll end up paying more interest to the lender.
However, extending the term means you’ll pay more interest over time. For example, at a 5% interest rate, extending a £200,000 mortgage from 25 to 30 years could save you £95.54 on your monthly payments but this relatively small saving now could cost you over £35,500 in extra interest over the long-term.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.