Families across the UK are finding it harder to meet their biggest monthly expenses as wages struggle to keep up and the cost of living continues to rise. Housing loan.
Homeowners with variable interest rates, or those who have moved away from low fixed rates from several years ago, are likely seeing their monthly payments increase as borrowing costs rise.
Floating rates track the Bank of England’s benchmark rate, which rose to 5.25% in August, the highest level since 2008, but this means mortgages take a larger share of household income. .
But what happens when the pressure on the household budget increases and monthly repayments become impossible?
There are a number of short-term solutions with little-known government support. mortgage letter It was signed by the lender last year.
One option open to repayment mortgage holders is to switch to an interest-only mortgage for up to six months, where the monthly payments are reduced because no principal has been repaid.
To qualify, the account must be on a timely payment basis and be a mortgage, not a sale. People who call their lender to take advantage of this option will not undergo an affordability check and their credit score will not be affected.
However, there are also drawbacks. By switching to an interest-only mortgage for six months, the account holder is essentially deferring principal payments. This means that your monthly payments will be higher after six months for the same life of your mortgage.
However, if interest rates fall, people may pay less for their remaining borrowed capital.
As an example, if the account holder has £200,000 left to pay on a £300,000 mortgage over a 25 year term and the interest rate is 5%, the monthly repayments will be from £1,169.18 to interest only. Monthly payments of £833.33. This is a saving of £335.85 per month or £2,015.10 over 6 months.
Another option for support under the Charter includes extending the term of the mortgage by six months or more to reduce monthly repayments. Again, applicants will not be subject to an affordability check and it will not affect their credit score.
Prime Minister Jeremy Hunt, who announced the charter in June last year, said the measures would give people “powerful new tools” to manage their monthly budgets.
He added: “If you are concerned about the impact on your household finances and want to change your mortgage to interest-only, or extend your mortgage term and want to return to your original mortgage contract within six months, then It is possible,” he added. Therefore, no questions are required and your credit score will not be affected. ”
Other measures as part of the charter include that lenders cannot foreclose on a home within 12 months of the first missed payment. There is also the option of ‘locking in’ a deal six months out, but with interest rates falling this is probably not the best option for many people.