How to stay on top of rising mortgage repayments – and keep your home

Following rapidly rising rates earlier this year, mortgage rates have started to ease off – with some big providers even reducing rates in recent weeks.

This is thanks to better-than-expected inflation figures, which have finally started to decline.

As a result, the Bank of England chose to hold the Bank Rate at 5.25pc at its most recent meeting – when it had been expected to increase rates once more. While Threadneedle Street was expected to raise interest rates to 5.75pc by the end of the year, it now looks like they may have already peaked.

But rates are still far higher than they were a couple of years ago which, for or anyone with a mortgage, this is a huge concern. 

A buyer taking out a two-year fix in June 2021 paid an average rate of 2.59pc. This means the annual cost of taking out a typical £200,000 loan has jumped by more than £5,000 a year.

If you’re concerned about keeping up with your mortgage repayments, these are the options in front of you.

Consider a tracker mortgage

Fixed-rate mortgages remain the most popular option for homeowners; they tend to work for people’s budgets as bills will remain the same for the duration of the term. Currently, with fixed rates starting to fall and tracker rates holding steady, you might be able to find a decent fixed deal.

However, if the Bank Rate starts to retreat, then tracker rates will reduce anyone on a fixed term could end up paying over the odds.

Despite the risk that your payments could increase at any time, tracker mortgages could be a consideration in case fixed rates reduce further.

A rising number of borrowers have also rolled on to banks’ “standard variable rates”. You automatically get put onto the SVR when your fixed-term deals ends. While they are also often pegged to the Bank Rate, SVRs are currently priced far above both trackers and fixed rates and should only be used as a stop-gap, if at all.

Consider an interest-only mortgage

Interest-only mortgages are slowly on the rise again, according to lenders, following the mortgage endowment shortfall scandal which characterised the last financial crash.

Customers who opt for them only pay back the interest each month, and not the capital.

In theory, over the term of the loan interest-only borrowers typically pay down the capital in chunks – using bonuses, commission, or windfall inheritances. They can also use any equity which builds up in the house over time.

Prior to 2014, when rules around mortgages were tightened, lenders did not always have to verify borrowers’ income, and in many cases repayment plans were simply not in place.

This led to borrowers getting used to smaller monthly payments, and many did not set funds aside to pay off the rest of the debt.

This time around, however, lenders have strict eligibility rules for borrowers who opt for interest-only payments – including minimum income thresholds and equity requirements.

At the end of last year, the City watchdog told lenders that borrowers wishing to reduce their monthly payments during the cost-of-living crisis may want to switch their capital repayment mortgage to interest-only for all or part of the loan’s remaining term.

Switching to interest-only requires a “credible repayment strategy”, the Financial Conduct Authority (FCA) said, as well as an affordability assessment – including clear costing of the plan.

Ben Merritt, director of mortgages at Yorkshire Building Society, said he has seen an increase in customers opting for interest-only payments.

He added: “The target market has changed from what it was pre-financial crisis. It was once used to decrease payments and increase borrowing power. Now, you need a plausible repayment plan in place.”

For example, Halifax has a £75,000 sole minimum income requirement – £100,000 for joint borrowers – and a £300,000 equity requirement.

Building societies, such as Accord and Coventry have no minimum income requirement, but do still require minimum levels of equity.

Nationwide varies the equity requirement based on location. While borrowers in London need to have equity of £300,000, those in the outer south-east of England need £250,000, and those in the rest of the UK need £200,000.

Mr Merritt puts the rise in interest-only mortgages down to a combination of climbing interest rates and the need to free up cash to invest in higher yielding assets.

While switching to an interest-only mortgage will immediately reduce monthly repayments, there are lots of other things to consider.

It means your capital balance will go unpaid – hence the need for a repayment plan. It means that the overall interest bill will be greater over the life of the loan. And it means repayments will eat further into your income as rates keep on rising.

Leverage your savings with an offset mortgage

If you have a large savings pot, you may be able to use this cash to save on your mortgage costs, using an offset mortgage.

The savings will need to be held with your lender – and it’s worth pointing out that very few lenders offer this kind of deal. You’ll have to forfeit interest to reduce the cost of the loan, as you’ll only be charged interest on the difference between your savings total and the amount you’ve borrowed.

For example, someone with £100,000 in savings and a £500,000 mortgage would only be charged interest on £400,000.

This set-up can also save you tax; by forfeiting your savings interest, those with higher sums saved, or who pay additional-rate tax and don’t qualify for any personal savings allowance, won’t need to pay tax on savings interest. 

That being said, this cash won’t grow in value either, so you’ll need to consider whether the money you save on mortgage interest outweighs the savings interest you’re giving up.

See if you can extend your mortgage term

First-time buyers are increasingly turning to mortgages of 35 years, or even longer, in a bid to stretch out borrowing and reduce monthly payments. It’s something some homeowners could consider as well, but with caution.

Firstly, you’ll need to work out whether you’ll realistically be able to make mortgage payments when you’re past retirement age, as many of these longer terms won’t be paid off until borrowers are in their seventies.

Secondly, the monthly reductions might not make much of a difference.

“Extending the term doesn’t dramatically change monthly payments, and the downside of extending is you are just paying more interest,” says Simon Gammon, managing partner at brokerage Knight Frank Finance.

For example, over a 25-year term with £200,000 of mortgage debt and a 5.9pc interest rate, you would pay back £1,276 each month, totalling £382,847 over the full term.

Over a 35-year term, monthly payments fall slightly to £1,127 – but the total interest paid rises to £473,218 over the full term. 

Mr Gammon said: “One thing to remember is the interest you pay on a capital repayment mortgage is front-end loaded. So, the loan doesn’t reduce by the same amount each month.

“Lenders want the lion’s share in the first 15 to 20 years. In the final years of your mortgage, you’re only paying back the capital.”

Rent out your home

In some cases, you may be able to make extra money to cover higher mortgage repayments by temporarily renting out your property. This is, of course, dependent on how much it would cost you to live elsewhere.

To do this, you’ll need a “consent to let” agreement from your lender. This is a formal written agreement giving you permission to rent out your home for a short period of time. It’s the only legal way to rent out your home on a residential mortgage; for anything longer-term you’ll need to convert to a buy-to-let mortgage.

There are a few possible restrictions; some lenders require a certain amount of equity, and for you to have been a customer for a certain amount of time before granting this arrangement. In addition, you’ll usually need to be fully up to date with your mortgage payments, and you can’t apply to borrow any more on the property while it’s being rented out.

Talk to your lender

Mortgage lenders have an obligation to help all customers experiencing financial difficulty, and if you’re struggling to meet your payments it’s a good idea to get in touch sooner rather than later. 

The FCA has told lenders they can waive affordability checks and the need for a repayment strategy for borrowers “in or at risk of payment shortfall” who need temporary relief. However, the City watchdog would not say how long borrowers could expect to be allowed to stay on interest-only deals.

In addition to relaxing some rules around offering interest-only mortgages as a forbearance measure, the FCA has released guidance for lenders on how to support customers. Other help can include offering access to budgeting tools, giving access to debt advice and coming up with tailored forbearance measures – which could include options like payment holidays.

Have your mortgage payments increased dramatically due to the current mortgage crisis? Have you had to look for an alternative way to pay – such as getting a different type of mortgage or switching to paying interest-only? We’d like to hear from you. Get in touch at money@telegraph.co.uk.

This article was first published on June 13 2023 and has since been updated.