What can I do to reduce my monthly mortgage payments?
You may have noticed over the last few weeks that mortgage costs and the ‘cost of living’ crisis have been covered extensively in the news. Interest rates are rising and are likely to continue to do so, this means that if you are buying a house or your current deal is nearing an end that your payments could be increasing significantly.
According to most sources, the light at the end of the tunnel may be some way off so it’s important to act now and not ignore things hoping they improve shortly. As times get harder and more borrowers are impacted by their payments rising significantly, more people will be looking into ways they can reduce their outgoings to survive and ultimately keep their homes.
As Professional Mortgage advisers we do have several solutions in our locker that may be able to help you if your payments are becoming unmanageable. These include: –
- Re-fixing as early as possible.
- Extending your original mortgage Term.
- Restructuring some, or all your mortgage loan onto an interest only basis.
Please read on below for a fuller explanation of each solution. The best thing you can do is call us or book an appointment online as our experts will be happy to see if any of these solutions fit your circumstances.
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Re-fix ASAP
The easiest and first thing to do is to prevent yourself being exposed to even higher rates, start looking at new deals at the earliest opportunity. We recommend you speak to us 7 months before the end of your current deal. We’ll compare the whole market against your existing lenders’ deals and make sure you lock in the best deal available now, protecting you against further predicted rises.
We will be happy to help you check when your deal ends and put a plan in place to avoid paying more than you need to.
Extend your mortgage term
If you’ve taken out a mortgage, the chances are you have promised to pay it back over 25, 30 or even 35 years. This is known as your mortgage term.
If you’re like most people, you’ll be on a repayment mortgage. This means that your plan and repayments are set up so that you’ll eventually own your property outright. In other words, if you’re on a 25-year term, after 25 years your house will finally be all yours. The same goes if you’re on a 15-year term, a 35-year term or anything else.
With interest rates on the rise, and many people experiencing significant rises in their monthly payments when coming off a fixed rate, extending the term of your mortgage loan could help ease the pressure on your monthly outgoings, the longer the term the less you must pay each month. However, lengthening your term will mean you pay more interest to the lender.
Is extending the term a good idea?
Ultimately, it all comes down to how much you need those lower monthly repayments. If you’re struggling with the monthly payments, extending your mortgage term will probably be worth it.
But if you’re managing just fine as it is, you might decide you’d rather pay off your mortgage quicker to take advantage of those lower overall interest charges.
Part repayment – part Interest Only
Typically, borrowers should be on a complete repayment (capital and interest) structure. This gives the borrower the security that at the end of the mortgage term they will have paid the capital back and the interest charged for the loan.
In the short term, a combination of the two types of mortgages can reduce the monthly repayment values. In contrast to a sole interest only mortgage, the combination of the part repayment mortgage ensures that some payment against the capital is being made.
A part interest only, part repayment mortgage (or ‘part and part mortgage’) is a flexible way for you to pay back the money you’ve borrowed to buy a property.
It means that you’ll only pay the interest on your loan plus an agreed portion of the original amount borrowed each month.
This unique type of home loan gives you the best of both worlds by covering the interest on the loan and paying off a portion of the mortgage at the same time.
However, it does mean that at the end of the loan term, you’ll still owe a sum of money and won’t completely own the property. Lenders will require that you have a plan in place to be able to pay off the remaining money owed. This will be in the form of a ‘repayment vehicle’ that has to meet certain criteria and which you’ll need to prove you have access to.
With part and part mortgages, it’s not always arranged as half interest and half repayment for the monthly payments.
‘Part & Part’ products will reduce your monthly mortgage payments (if you were on full repayment) and does at least continue to pay down the outstanding capital balance you owe the lender. In short it is not ideal, but it will mitigate rising interest rates and increased payments.
Interest Only
With an Interest Only mortgage, you’re only obliged to pay off the interest each month and capital repayments are optional. This means you can keep your payments to a minimum but are not reducing the outstanding capital over the term.
The mortgage debt itself isn’t due until the end of the term and is settled through a repayment vehicle, which the lender will want to see evidenced in advance.
This is a stark contrast to a capital repayment mortgage, which involves making interest and capital repayments each month and paying the debt off across the mortgage term, which is typically 25 years, but can be longer or shorter.
Lenders’ criteria for interest only mortgages is fairly strict due to their obligations to borrowers, and certainly does not suit every client, but it does have a place in the market.