If you are struggling to pay your mortgage bills as interest rates rise rapidly, our guide explains what you can do.
Mortgage rates have spiralled over the past month on the expectation that the Bank of England may have to push base rate all the way to 6 per cent to combat inflation.
But even before this rise, both fixed and variable rate mortgage costs were far higher than they have been in recent years.
This has come as interest rates finally start to rise after years at rock bottom levels, with the base rate now reaching 5 per cent.
That spells bad news for anybody needing to remortgage because their fixed rate mortgage deal is ending, or on a variable rate or tracker mortgage where costs rise as the base rate does.
But if you can’t pay your mortgage or are struggling, the most important thing to do is not bury your head in the sand and to seek help instead. We explain what you need to know.
Mortgage rate increases come amid the cost of living crisis as food and fuel costs are being pushed up and putting pressure on household finances
What is happening to mortgage rates?
In June 2021, the average two-year fixed rate was 2.55 per cent but that has now shot up to 6.19 per cent, according to data provider Moneyfacts.
Five-year fixed rates are also substantially more expensive than they were at 5.83 per cent.
Those coming to the end of fixed rate deals face big jumps in their monthly payments, due to the higher cost of new mortgages – or the expensive alternative of lenders standard variable rates, which can be 7 per cent or more.
Borrowers on tracker mortgages have seen their monthly costs also increase as a result of the rise in the Bank of England’s base rate which now sits at 5 per cent – the highest rate since 2008.
Those on standard variable rates are also likely to see costs rise as lenders pass on the hike.
Markets now expect that the Bank of England will raise the base rate to 5.75 per cent later this year. Some traders are even betting on it getting to 6 per cent.
However, while lender stress tests mean borrowers who took out mortgages since 2014 should be able to withstand interest rates of up to 7 per cent, these tests do not take into account of the impact wider economic pressures, such as high inflation, have on households’ overall budgets.
In May inflation stuck at 8.7 per cent remaining the same as the month before and disappointing those who expected it to fall. It is far from the Bank of England’s target of 2 per cent, driven up by energy and food prices.
Mortgage arrears in the UK reached £14.9 billion in the first quarter of 2023, accounting for 0.89 per cent of outstanding mortgage balances, according to data from the Bank of England. The total increased by 9.5 per cent over the quarter and 12.5 per cent over the year highlighting the pressure borrowers are under.
Borrowers on variable rates are more exposed to increases than those on fixed rate deals, as the latter will only be affected when they come to remortgage
Speak to your mortgage lender early on
‘If you are in arrears or facing hardship then the best advice is to speak with your lender,’ says Nick Mendes, mortgage technical manager at John Charcol.
‘Household [budget] pressures are rising like never before and mortgage rates are increasing as well. It’s a double whammy.’
Advice to customers from the Financial Conduct Authority is that if a customer is in arrears (meaning they have missed mortgage payments) or at risk of arrears, they should speak to their mortgage provider as soon as possible.
They will run through the customers’ budget with them to get the best idea of what options are available.
It is also worth checking your insurance policies as some include mortgage coverage under certain circumstances.
There are several ways to reduce the monthly payments in the short term – though most will mean the mortgage ends up costing more in the long run.
The new measures to help struggling borrowers
Homeowners will not be forced to have their properties repossessed within 12 months from their first missed paymentsPeople will be able to switch to an interest-only mortgage for six months – or extend their mortgage term to reduce their repayments and switch back to their original term within the first six months – without an affordability check or affecting their credit scoreCustomers approaching the end of a fixed-rate deal will be able to lock in a new deal up to six months ahead, and be able to apply for a better deal up until the new term starts if one is availableThose worried about their mortgage repayments can call their lender for support and information, without it impacting their credit scoreHomeowners who are up-to-date with payments will be given support to switch to a new mortgage deal at the end of their existing fixed-rate deal without another affordability check
Switch to an interest-only mortgage
The first option to reduce your costs could be switching from a repayment and interest mortgage to an interest-only option temporarily.
This effectively pauses their outstanding mortgage at its current level. The borrower will stop paying off the balance of the loan, and instead pay only the interest that accrues each month.
‘Interest only will reduce the monthly payment which could give some valuable breathing space,’ explains David Hollingworth of mortgage broker L&C.
However, this move should be treated as temporary. The borrower will be left with less time to repay the mortgage balance once they switch back, and more interest will have to be paid each month to make up for missed time.
The bigger danger is if the mortgage is never switched back to repayment. This could become a major problem if the end of the term is reached without any way of repaying the mortgage balance.
Often, borrowers in this situation are forced to sell their home to eventually pay back the bank.
Jump off your standard variable rate
Hundreds of thousands of mortgage holders could be ‘suffering in silence’ on standard variable rates, with their lender driving up their monthly payments as rates continue to rise.
Also known as reversion rates, SVRs are lenders’ default rates that people tend to move on to if their fixed period ends and they do not remortgage on to a new deal.
They usually come with a higher interest rate than fixed deals. The current average two-year fixed rate is 6.19 per cent and the five-year is 5.83 per cent, according to Moneyfacts. The average standard variable rate is 7.52 per cent.
Currently around 773,000 borrowers are on an SVR mortgage, according to figures from UK Finance.
If you find yourself on an SVR speak to your broker or lender to see if there is a better deal you can sign up to in order to cut your costs.
Most lenders – around 97 per cent – will offer a new deal (such as a fixed or discounted rate) to existing customers who are not borrowing more providing they are up-to-date with payments, so it is always worth asking.
Ask for a mortgage payment holiday or reduction
The second option is to ask your lender for a mortgage payment holiday, also known as a payment deferral. This allows a homeowner to temporarily stop or reduce their monthly mortgage payments.
Payment holidays were used by some borrowers that were struggling financially during the pandemic, as banks were required to offer them to any customer that sought one.
In the first three months after the scheme’s launch, one in six mortgages were subject to a payment deferral, with the typical suspended payment totalling £755 per month.
Banks are no longer required to offer payment holidays to borrowers, but those struggling can speak to them and request one. Lenders are likely to want borrowers to maintain some level of payment each month, rather than stopping altogether.
Research from the Bank of England shows that mortgage borrowers with payment deferrals during the pandemic were less likely to cut their spending elsewhere.
Again, it is important to remember that payments will be more expensive once the holiday ends, in order to pay back the mortgage by the end of the term. The extra interest accrued will be added to the outstanding mortgage.
Mendes said: ‘You have got to take into account the increased cost of paying overall. You can take a payment deferral or reduce your month repayment, but in six months’ time your repayment will have gone up’
Warning: Reducing your mortgage payments in the short term will usually increase the overall amount owed
Extend the length of your mortgage
A third option is extending the duration of your mortgage in order to spread the payments over a longer period of time. For example, you could extend a 25-year mortgage by an extra five years to make it a 30-year term.
For those on a fixed deal, this usually needs to be done at the point of remortgage. Banks don’t commonly offer mortgages of more than 40 years in length, and they often won’t extend your mortgage if it means you will still be paying it into retirement or past a certain age.
Again, this will help to reduce the amount of each monthly payment, by restructuring the mortgage over a longer term but will come at a bigger cost in terms of interest payments.
However, unlike an interest-only option, it does mean the mortgage will ultimately be repaid, even if the term is never reduced back down to the original timeframe.
Support for Mortgage Interest scheme
In addition to direct solutions with your lender, the Government runs the Support for Mortgage Interest scheme which loans money to those on low incomes to help them meet their mortgage payments.
The scheme offers low-interest loans from the Department of Work and Pensions to help pay the interest element of a mortgage. They can’t be used to pay down the balance.
It is only available for homeowners already receiving Government benefit support such as income support, income-based Jobseeker’s Allowance, or pension credit.
The money received through the scheme is a loan – not a benefit – meaning it is added to the amount outstanding against your house.
For those who think they will struggle with mortgage payments in the long term, another option is to consider selling the home, perhaps moving to a smaller property with cheaper mortgage payments.
This is more realistic for those with substantial equity in their home, which they could use as a deposit for another property or even to buy one outright.
Mortgages: What you need to do
Borrowers whose current fixed rate deal is coming to an end face much higher costs and should explore their options as soon as possible.
Those who have agreed to buy a home should also check how much they can borrow and monthly payments and consider locking in a deal.
This is Money’s best mortgage rates calculator powered by L&C can show you deals that match your mortgage size and property value
What if I need to remortgage?
Borrowers should compare rates, speak to a mortgage broker and be prepared to act to secure the option of a new rate.
Anyone with a fixed-rate deal ending within the next six to nine months should look into the best rates they can get – and consider locking in a new deal. Often there is no obligation to take it.
With rates spiking right now, if you are planning ahead it is possible that they may fall by the time you need the mortgage. Most mortgage deals allow fees to be added to the loan and only be charged when it is taken out. By doing this, borrowers can secure a rate without paying expensive arrangement fees.
Ask your broker about this and check if you are obliged to take the rate or could shift to a cheaper deal if rates fall before you take the mortgage out.
What if I am buying a home?
Those with home purchases agreed should also aim to secure rates as soon as possible, so they know exactly what their monthly payments will be.
Home buyers should beware overstretching themselves and be aware that house prices may fall from their current high levels, as higher mortgage rates limit people’s borrowing ability and buying power.
How to compare mortgage costs
The best way to compare mortgage costs and find the right deal for you is to speak to a good broker.
This is Money has a long-standing partnership with fee-free broker London & County to help readers find mortgages.
You can use our best mortgage rates calculator to show deals matching your home value, mortgage size, term and fixed rate needs.
Be aware that rates can change quickly, so compare rates well ahead of any deadlines and speak to a broker as soon as possible, so they can help you find the right mortgage for you.