Research suggests almost a third of households are already worried about meeting their mortgage repayments. Now, the Bank of England (BoE) has warned that millions of households could see a significant jump in their repayments by the end of 2026.
Read on to understand if your finances could be affected and what your options are.
According to a BBC report, the BoE has said mortgage holders “may struggle with repayments” following consecutive base interest rate rises, that have been made in an effort to lower high inflation.
In December 2021, the base rate was just 0.1%, which made borrowing more affordable. As of August 2023, the base rate is 5.25%. Consumers with debt, including mortgages, may have seen their outgoings rise as a result.
The BoE’s Financial Stability Report noted that as fixed-rate mortgage deals expire, mortgage repayments for millions of families will go up.
The Bank estimates that 2 million households will pay between £200 and £499 more each month by the end of 2026. A further 1 million mortgage holders could see their repayments rise by at least £500.
Check your mortgage to understand how you could be affected by soaring interest rates
Understanding your current mortgage could help you better prepare for a jump in your repayments.
If you have a variable- or tracker-rate mortgage, it’s likely your repayments have already increased over the last 18 months. While inflation is starting to fall, it is still high, and the BoE could further increase the base rate. So, it’s worth reviewing how your finances would cope if rates continued to climb.
The BoE report suggests those that will face the biggest financial shock are households with mortgages on a fixed-rate deal.
If you fixed your interest rate before the end of 2021, you may have been shielded from rate rises so far. It means that when your current deal ends, your repayments could shoot up far more than you expect.
According to Moneyfacts, as of August 2023, even the most competitive remortgage rates exceed 5%.
Taking some time to review how current interest rates would affect your repayments compared to your fixed-rate deal may help you identify ways to update your budget in preparation.
Whether you have a fixed- or variable-rate mortgage, check when your current deal ends. When it expires, your lender will often move you on to their standard variable rate, which is usually higher than comparable deals.
Shopping around could help you secure a mortgage that lowers your repayments.
3 useful options if you’re struggling to meet higher mortgage repayments
If you’re struggling to pay higher mortgage repayments, don’t bury your head in the sand.
There may be steps you can take to balance your outgoings while remaining in your home. Here are three options you could consider.
1. Take a repayment holiday
A repayment holiday isn’t a long-term solution, but it could offer some reprieve if you’re facing short-term challenges.
A mortgage repayment holiday is an agreement you make with your lender. It would allow you to temporarily reduce or stop your monthly repayments. It could be useful for overcoming short-term financial challenges. For example, if you’ve had to take time off work due to a serious illness.
Your lender will assess your circumstances if you request a repayment holiday, including reviewing your previous payment history. Some lenders may require you to have previously overpaid your mortgage to receive a repayment holiday.
If a mortgage holiday could help you, contact your lender to discuss your options.
2. Extend your mortgage term
Your mortgage term is how long you’ll pay your mortgage for. One way to reduce regular outgoings is to extend it so your repayments are spread out over a longer time frame.
Let’s say you have £200,000 remaining on a repayment mortgage with a term of 20 years and an interest rate of 5%. Your monthly repayment would be £1,320. If you increased the mortgage term to 30 years, your repayment would fall to £1,074.
However, there are drawbacks to extending your mortgage term. As you’ll be repaying the debt over a longer period, you’ll pay more interest overall.
Using the above scenario, the table below demonstrates how extending the mortgage could cost you thousands of pounds.
Source: Money Saving Expert
When extending your mortgage, you also need to consider your circumstances. For instance, many lenders will want your mortgage term to end before you retire.
3. Switch to an interest-only mortgage
Most people take out a repayment mortgage. This means each month you pay the accrued interest and some of the outstanding debt. If you keep up with repayments, you’ll own your home outright at the end of the mortgage term.
If soaring interest rates mean you’re facing financial difficulties, switching to an interest-only mortgage may be an option worth considering.
With an interest-only mortgage, you’d only pay the accrued interest and don’t reduce the debt. So, your mortgage payments are likely to be lower.
However, keep in mind that as you wouldn’t be reducing the debt, you will still owe the same amount when the mortgage term ends. It’s often a good idea to have a long-term plan when taking out an interest-only mortgage – will you switch to a repayment mortgage in the future? Or will you have other assets you could use to pay off the mortgage?
Contact us to discuss your mortgage and interest rate
As a mortgage broker, we can help you understand your options if you’re searching for a new mortgage.
We can assess which lenders may be right for you and could secure you a competitive interest rate, which may lower your repayments. Please contact us to talk about your mortgage needs.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.