A few weeks ago the Bank of England raised the interest rate to 1.75%, the biggest hike in 27 years. Inflation is soaring far higher than wage rises, which adds up to grim news for people trying to make ends meet.
For many people, the most important financial commitment they have is their mortgage. Rising rates mean increased mortgage payments. So what can you do if you are worried you won’t be able to pay? Here’s my advice.
Paying the mortgage.
The current interest rate hike means the average property owner is set to see an increase of around £52 a month. But of course, the amount you pay depends on the deal you are on and how much you borrowed. The big issue here is affordability.
If you are concerned about your ability to pay your mortgage then take a bit of time to get to know the deal that you are on first. If you’re approaching the end of the agreement or aren’t that far off, then switching to a better rate might be a good idea. Surprisingly, leaving your current deal early could save you some cash, though you’ll need to balance that against any early exit fees. Speak to your mortgage company or broker about the options available to you before committing.
If you’re worried about getting through the short term, then explain to your lender that you are facing financial difficulties. You may qualify for a mortgage payment holiday. This is a short period where you are given a break from your regular payments – though interest continues to accrue and the missed payments get tagged on the end of the mortgage, so you will pay more long-term. Alternatively, the mortgage firm might agree to allow you to stop payments while you get back on your feet. Ask if this will impact your credit score though.
You may be able to switch to an interest-only mortgage too (temporarily or permanently) or extend the term of your mortgage. An interest-only mortgage does exactly what it says on the tin – you pay the interest on the mortgage but not the underlying cost of the property itself. This leaves a rather obvious problem though, as you will not end up owning the property unless you have an alternative way of paying off the debt. However, some mortgage lenders may allow you to switch to an interest-only deal temporarily.
Extending the term of your mortgage might be more realistic (and you may be more likely to qualify to do this). Your payments will reduce, but bear in mind the interest you pay will ultimately be higher. You may also face problems if the new term takes you past what your bank thinks your retirement age will be.
In worst case scenario and you have run up debts, then the lender might allow ‘capitalising the arrears’. This is where your lender agrees to add the arrears to what you owe on the mortgage. But your payments tend to increase when this happens, so this may only be possible with an extended term. Alternatively, you can always consider downsizing – selling your property and moving to a cheaper one. No-one wants to consider this option, but it’s better than losing a home you can’t pay for.
Mortgages are one of the biggest financial commitments we will make in our lives, so whatever you decide, it’s vital you take realistic, professional advice and understand all the options and implications before continuing.
When to seek help
The most important step you can take when tackling your finances is to make a simple list of all your incomings and outgoings every month. If you are left with little money, or are paying out more than you have coming in, then you are in financial difficulties and should seek help immediately.
If a financial business is not helping you when things go wrong, the free Financial Ombudsman Service may be able to look at your complaint.
Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist.