2022 was not a good year for homeowners. Back in February last year, the Bank of England’s decision to raise interest rates by 0.25 percentage points to 0.5% had heads turning, seen as a sign that the Bank was concerned about rising inflation.
The BoE’s Monetary Policy Committee would return with eight more hikes in the calendar year, culminating in the base rate of interest hitting a 15-year high of 3.5% in December. The cost of borrowing, including holding a mortgage, had multiplied alarmingly. And homeowners are warned to expect more pain in 2023, starting with an imminent leap to 4%.
All of this does come with a caveat, of course. Back in March 2020 just as the COVID-19 pandemic was taking a grip, interest rates dropped to a record low of 0.1%. This was the culmination of a long and unprecedented period of becalmed rates stretching back to the financial crisis of 2008. Anyone who remembers the double-digit interest rates of the 1980s will remind you that borrowing has never been so cheap.
Yet this still comes as little comfort to many mortgage holders. Over the past decade, low-interest rates have encouraged people to take out bigger and bigger mortgages, contributing to a turbo-charged housing market. If you have taken out a mortgage worth five or six times your salary, even a small increase in interest repayments can hit your monthly budget hard. And this, of course, is against the backdrop of high inflation pushing up other household bills.
Average mortgage rates have roughly doubled since December 2021. At that time, you might have expected to pay around £900 per month on a £200,000 mortgage at a rate of 2.5%. If you are on a tracker or variable rate mortgage, you are likely to be paying at least £250 more per month now.
And unless you are on a very long-term fixed-rate mortgage (and therefore paying more for the stability anyway), there’s little comfort in the fact that you will still be paying the lower rate. When your fixed rate term ends, your mortgage costs will leap up very suddenly. If you haven’t budgeted accordingly, this sudden spike could cause you serious difficulties.
Controlling mortgage costs
So with the expectation that things will get worse before they get better with regards to the cost of mortgages, what can you do to ensure you can keep repayments manageable?
Your options fall into two broad categories – reduce or at least cap your mortgage repayments to keep them affordable, or look at your budgeting elsewhere to see if you can free up more cash for your mortgage.
The best long-term solution is to keep your mortgage as cheap as possible. But that isn’t easy at the moment as all lenders are putting up their costs in line with the BoE base rate going up. You can shop around to see if you can find a cheaper deal, but bear in mind that you will usually have to pay charges for switching mortgages to another provider.
If you are on a fixed term or a time-limited tracker or discounted mortgage, make sure you know exactly when the term ends. As soon as it does, your lender will revert your mortgage to its standard variable rate (SVR), which will also be its most expensive. If this happens, you could see your mortgage repayments shoot up by hundreds of pounds in a single month.
Seek help if you are struggling
Talk to your current lender about what deals they can offer to follow on from your current term. It will be more expensive than what you have been paying. It’s worth shopping around to see what else is on the market. If what your current lender offers is considerably more expensive than the best deals you can get elsewhere, then there is a strong case to remortgage. It might cost you up front, but potentially could save you thousands over the course of a two to five-year term.
If you have seen your mortgage repayments increase sharply on an existing tracker or variable deal and are struggling to cover them, talk to your mortgage provider immediately. Financial service industry rules state that they must “treat you fairly and give you a reasonable chance to make arrangements to pay off the arrears.” Options include negotiating a short break from making payments (a “payment holiday”), extending the duration of your mortgage to lower monthly repayments, or switching to interest-only payments for a while.
If you receive certain benefits including Income Support, Job Seekers’ Allowance and Universal Credit, you can apply for a loan from the government to help cover your mortgage interest repayments.
Budget for higher outgoings
From the other side, we’d strongly recommend everyone with a mortgage to look seriously at their budgeting right away. One way or another, your mortgage costs are going up, and it pays to be prepared. It’s not easy when the costs of putting food on the table and heating your homes are going up, too. But what’s at stake here is keeping a roof over your head.
If ever there was a time to go through your outgoings and trim them back to what is absolutely necessary, it’s now. In particular, if you’ve been on the same mobile, broadband, insurance or other subscription services for years, you can probably get a better deal. Taking the time to shop around and switch could free up the spare cash you need to ease concerns about your mortgage.