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

If you got a fixed-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 re-mortgage 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.

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

In addition, the Bank of England further increased its base rate 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 increases, it becomes more expensive for lenders to manage the risk they take on when offering mortgages and, as a result, 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 their costs increase 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 lender stress tests mean that borrowers who have applied for mortgages since 2014 should be able to withstand interest rates as high as 7 percent, these tests do not take into account broader economic pressures, such as rising inflation, which affects general household budgets.

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

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

Variable-rate debtors are more exposed to increases than fixed-rate debtors, 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 since June 2010 when arrears hit £2.09bn, according to Bank of England data 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 are no longer able to do so.

Talk to your mortgage lender up front

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

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

The advice to clients from the Financial Conduct Authority is that if a client is in arrears (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 clients’ budget with them to get the best idea of ​​the options available.

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

There are a number of ways to lower your 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 will instead pay only the interest that accrues each month.

“The interest will only lower the monthly payment, which could provide a valuable breather,” says David Hollingworth of L&C Mortgage Broker.

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

The biggest danger is if the mortgage is never changed back to payment. This could become a big problem if you reach the end of the term with no way to repay the mortgage balance.

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

Request 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 experiencing financial difficulties during the pandemic used payment moratoriums, since 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 a payment deferral, with a typical suspended payment totaling £755 per month.

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

Research from the Bank of England shows that 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 usually increase the total amount owed.

Warning: Lowering your mortgage payments in the short term will usually increase the total amount owed.

Again, it’s important to remember that the payments will be more expensive after the vacation is over, in order to pay off the mortgage at the end of the term. Additional accrued interest will be added to the outstanding mortgage.

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

Extend the term of your mortgage

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

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

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

Unlike an interest-only option, however, it means the mortgage will eventually be paid off, even if the term is never reduced to the original term.

Mortgage interest support regime

In addition to direct solutions with your lender, the Government runs the Mortgage Interest Support scheme which 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 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, income-based job search allowance, or pension credit.

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

There are also services like Citizens Advice and Money Helper that provide free, independent advice on financial matters and can discuss options with you.

For those who think they will have problems with mortgage payments in the long run, 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 on another property or even buy one outright.

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