A mortgage broker has issued guidance to borrowers on how they can lessen the financial impact of higher repayments if they are worried about defaulting or going into arrears.
L&C Mortgages has offered the pointers in response to figures showing the number of arrears and repossessions climbed in the first three months of 2023.
The number of properties repossessed in the first quarter of this year was also 50% higher than in the previous three months.
Meanwhile, arrears – where a payment is overdue – were up slightly between January and March 2023, according to the figures from UK Finance.
This is a consequence of soaring interest rates, which have had a direct impact on mortgage prices and seen borrowers’ repayments soar.
L&C said whilst these increases were from a ‘very low base’ it recognised many borrowers coming to the end of their current deals would been keen to find ways to mitigate the pain of the higher mortgage rates.
Here are a few methods L&C have suggested to help. Not all will be suitable for everyone. See which is applicable to you and your circumstances…
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Keep your eye on your current deal
If you are fortunate enough to be on a fixed rate now you’ll be protected from interest rate hikes. But what will happen when you come to remortgage?
Whilst it won’t be possible to avoid paying a higher rate L&C said by keeping the current deal under close review you’ll have a better chance of taking advantage of the best options.
David Hollingworth, associate director at L&C Mortgages explained: “Mortgage rates are higher than the historic lows that borrowers have been used to in recent years but have stabilised after the rapid increases in fixed rates after the mini budget.
“The recent base rate rise and potential for more to come has seen some fixed rates tick up again but borrowers can secure a rate well before their current deal is due to end with most lender offers valid for up to 6 months.”
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Extending the mortgage term
According to L&C it could be possible to extend the term of a repayment mortgage to help manage down the monthly payment.
However, whilst this will help you maintain a lower monthly repayment it will increase the total amount of interest over the lifetime of the mortgage.
Holllingworth said: “Hollingworth said, “This isn’t a decision to take lightly as lengthening the mortgage term will come with a cost.
“However, it could be a useful measure for managing budgets in the near term, to help adjust to the higher costs that come not only with higher mortgage rates but also general cost of living.”
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Consider an interest-only mortgage
Switching to an interest-only mortgage from a repayment mortgage would cut the monthly cost as you will only need to pay the interest, not the loan.
However, to be eligible you will need to ensure you have a robust repayment strategy in place, said L&C.
Hollingworth added: “Interest-only could look attractive to reduce the monthly payment but it’s also important to have a repayment plan in place.
“Reducing payments comes at the expense of reducing the mortgage amount gradually over time and switching back to repayment could only get harder over time.”
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Mortgage payment holidays
Mortgage holidays, which became common during the pandemic, involve borrowers taking a break from making repayments for a specified period of time.
Remember, the loan still exists and the interest will build up, and they will need to be paid off eventually.
Hollingworth said: “Payment holidays could be a useful short term measure to cover a difficult time that should come to an end in the foreseeable future.
“For example, where a new job has been secured but not yet started, a payment holiday could help to avoid bigger problems in the interim.
“Remember that the interest will be added to the mortgage so there’s a longer term cost to a payment holiday and payments will be slightly higher when they resume.”
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Look at ways to manage other debt
Do you have any other debts? Maybe you have only been making the minimum payment on your credit card or have an unsecured loan?
With credit card interest being so high, it may be more financially astute to consolidate this additional debt and use the mortgage to reduce outgoings, L&C suggested.
“Consolidating debt into the mortgage could slash the rate of interest and reduce the outgoing,” said Hollingworth, “but it needs to be approached with care.
“This could turn short term debt into a long term commitment, which could ultimately end up costing more, so it needs careful thought before using equity in the home to pay off other loans.”
And finally… If you are in serious difficulty – speak to your lender
For anyone running into difficulty in meeting payments – the first step should be to talk to your lender sooner rather than later, said L&C.
Lenders are required to find solutions to help borrowers avoid missing payments and L&C said they will look at your circumstances and apply an appropriate measure.
There are also debt charities which can help.
To find out more about how to manage if you are worried about missing repayments read this article.
