
You, the readers, are a really helpful group. After Making Money Make Sense published excerpts from some of the reader letters that it had received, some of you got in contact to offer feedback and discuss your own personal experiences.
An notion that was mentioned many than occasions in answer to Claire’s inquiry piqued my curiosity in particular. She had six months remaining on her five-year fixed rate mortgage when she wrote to ask what on earth she could do when her payments soared by several hundred pounds a month – like those of so many homeowners in today’s market. She was in the same situation as so many other homeowners.
A few of you have advised that she give some thought to the Rent-A-Room Program. By participating in this programme, the government will exclude up to £7,500 of the income that you generate from leasing out furnished accommodation in your house from taxation.
In spite of the fact that you will have to rent out more space in your house if you make full use of that provision, you will be able to bring in an additional £625 per month. Having said that, if you have a friend or sibling who is going through a situation that is comparable to yours, it may be worthwhile to move in together, rent out one of your homes (you’ll need the permission of your lender for this), and take advantage of the Rent A Room Scheme for a year if you can.
Naturally, this won’t be a viable option for those whose mortgage payments would skyrocket as a result of this change. Here are some other possibilities for your consideration.
Talk to your lender and broker
Both the Bank of England and the Financial Conduct Authority have issued warnings to the nation’s banks and building societies, stating that in the event that a client experiences financial difficulties, the institution in question should work to ensure the client’s satisfaction. That almost certainly indicates that they are not going to kick you out of your house at this point.
Samuel Mather-Holgate, a mortgage broker at Mather and Murray Financial, adds that lenders are already “tend[ing] to be flexible” by either extending a mortgage term or enabling you to go on to interest-only for a spell. Both of these options are available to borrowers.
Extend your mortgage term
This is a rather straightforward approach to reducing the size of monthly payments. This is how the process goes. Imagine that you still owe £200,000 on your mortgage and that you have 20 years remaining on the overall length of your loan. A fixed rate contract signed around two years ago would have had an interest rate of approximately 2.5 percent, which would have resulted in monthly repayments of £1,060. The identical mortgage with a two-year fixed rate of 4.58%, which is the best bargain presently available for a 75% loan-value contract and is offered by the Yorkshire Building Society, results in monthly instalments of $1,274. If we extend the period to 25 years, the amount that we would pay each month will be $1,121.
The drawback to selecting this alternative is that over the course of the whole mortgage, you will end up paying a large amount more in interest. You would end up owing your lender a total of £105,748 in interest over a period of 20 years. This interest accumulates to a total of £136,230 over the course of 25 years, which is an increase of £30,482. You might minimise the impact of this by extending the duration of the mortgage for the time being and then reducing it the next time you refinance.
Go interest-only
Switching the same £200,000 mortgage from repayment to interest-only on that YBS two-year fixed rate of 4.58% takes monthly payments down from £1,274 to £763.
This shouldn’t be a long-term way to cope with higher rates as you’re only paying the interest, meaning your debt stays the same. Although inflation will go some way towards mitigating that cost, you’ll pay your lender £183,200 in interest over 20 years. Gulp.
One way to bring that down is to switch just part of your mortgage on to interest-only and keep paying off some of the capital, albeit at a slower rate. Greig Cowley, a broker at Riverside Mortgages, says: ‘This reduces payments but means that at the end of the mortgage, you’ll need to find a lump sum to cover the part that was interest-only.
‘It might be an option for some who need a short break, but realistically, if you’re struggling to make the payments, it might be better to bite the bullet and downsize rather than struggle month to month.’
Sell up
Even though it is probably not at the top of the list, for some individuals this will be the best course of action. A house with a lower purchase price will result in a lower loan-to-value ratio, which will allow for lower interest rates.
If you currently have a mortgage for £200,000 and your existing property is worth £300,000, the best offer you can get is that 4.58% from YBS, which is available up to $75,000.
Since you currently have an equity position of £100,000, purchasing a property for £250,000 would enable you to obtain a two-year fixed mortgage from Bank of Ireland at a rate of 4.49 percent. At that rate, the amount that would be repaid per month would be £948.
Pay off a lump sum
This choice is the best way to go if you can possible afford it; even if you’re borrowing a lot less, the same rationale applies. If you are able to afford it, this option is the best way to go.
The majority of mortgages provide you to make an extra payment equal to up to 10% of the outstanding debt each year without incurring fees associated with early repayment, and you are able to add to that payment after your mortgage term comes to an end.
Free and confidential help
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