Furlough is set to end in just over two months and already, job cuts are pushing 650,000, leaving thousands worried about how to pay the bills, l
Furlough is set to end in just over two months and already, job cuts are pushing 650,000, leaving thousands worried about how to pay the bills, let alone the mortgage.
Whether you’re concerned you might lose your job or not, cutting the cost of any outgoing is a sensible move right now and that’s even truer for your mortgage, which is likely to a household’s single biggest outgoing.
With fewer mortgage deals to choose from than ever before borrowers may feel that their hands are tied, especially as lenders become more picky about who they lend to. But there are still ways to cut down on that monthly bill and potentially save thousands of pounds in the long run while doing so.
This guide is intended to give you the basics on how to launch your own post-Covid recovery by cutting the cost of your mortgage.
There are still ways to cut down on your monthly bill and potentially save thousands of pounds
Move off your standard variable rate
One of the biggest mortgage mistakes you can make is slipping onto your lender’s standard variable rate – the interest rate you default to when your fixed rate deal comes to an end – and not then moving back onto a cheaper deal.
This can end up costing hundreds of extra pounds a year, and there are usually no downsides to switching to a cheaper deal. The caveat here is that if you switch lender, they’ll value your home which could affect the deals you are eligible for.
In recent years mortgage rates have dropped to historic lows meaning for many households, it’s possible to save hundreds or even thousands of pounds a year by remortgaging.
Lots of mortgages come with a fee attached, which can often be rolled into the loan. Think carefully about this – a rate may seem cheap at first, but a high fee could end up costing you more over the long run.
Use our online mortgage calculator to figure out how much you’ll actually be paying once you take both the fee and the rate into account. Some price comparison sites can help you find a cheaper rate, as can mortgage brokers.
Ask your lender for a better deal before you switch
Households are routinely warned about the so-called ‘loyalty penalty’ that sees them offered a worse deal than new customers on everything from house insurance and energy to broadband.
For years, this ‘loyalty penalty’ has applied to home loans, too.
But while customers are still moved on to the standard variable rates if they do not switch to a new deal, banks and building societies are becoming far more proactive in tempting customers to stay with them.
It means that lenders are now more likely to offer mortgage rates that match or even beat the best deals they offer to new customers, or that their usual arrangement fees are either slashed or waived altogether.
These deals aren’t always available to new customers, meaning you won’t find them online or in branch.
In some cases, lenders may offer the same interest rates to all customers but reduce its arrangement fees for its existing customers.
Make sure you ask your existing lender what the best deal you’re eligible for is before committing to another lender.
The other advantage of staying with your existing lender is that moving to a new deal won’t require a new underwrite – in other words, they won’t need to value your home again or put you through a new affordability assessment.
Consider a mortgage holiday – but only if you really need one
The Government’s mortgage holiday scheme was recently extended so that the deadline for applying is now 31 October, with borrowers eligible for a break of up to six months.
The Government’s mortgage holiday scheme’s application deadline is now 31 October
A payment holiday can be offered to anyone who asks for one, and borrowers who are behind on commitments should be treated the same as those who are up to date, the Financial Conduct Authority says.
This means you won’t need to be in arrears and in the majority of cases won’t need to show proof of financial hardship to qualify.
You may however need to provide a brief description of your circumstances, the loan details and confirm that you are struggling to keep up with repayments.
You then will be asked how long a break you wish to take and when you want it to start.
Most major banks and building societies now have a payment holiday form online. Visit your bank’s home page and follow the links to coronavirus related advice.
If you don’t have access to the internet or need urgent help, call your lender but be prepared for long delays. There are reports of customers waiting for hours before getting to speak to someone.
This option comes with a serious health warning however – a mortgage holiday isn’t to be taken lightly as it will end up costing you more in the long run and may restrict your access to future finance.
Technically speaking, taking a payment holiday automatically puts you in arrears on your mortgage.
While the Government has promised these payment holidays won’t affect credit reports, it can’t stop lenders from refusing to lend to these borrowers in future.
And industry insiders have claimed that some lenders are already starting to automatically decline applications for those who have taken a payment holiday.
So think carefully whether you want to do it and how it could affect your ability to refinance in future.
Consider switching to an interest-only mortgage
If you’re struggling to keep up with the monthly mortgage payments you could consider switching to an interest-only deal.
An interest-only mortgage offers a cheaper way to purchase a property than with a capital repayment mortgage, because borrowers are only paying off only the interest and not the capital.
For example, a £100,000 home loan at 3 per cent over 25 years would cost £250 per month interest-only, and £474 per month capital repayment.
But at the end of the mortgage term, the interest-only loan will have paid off only the interest – leaving the original £100,000 debt to be repaid, whereas the repayment mortgage would have cleared the debt.
If you’re struggling to keep up with the monthly payments you could switch to interest-only
Interest-only mortgages are nothing new and were extremely popular in the heyday of endowment policies, which were sold as repayment vehicles alongside them.
That said, there have been a lot of problems for those whose endowments didn’t perform and who had no other way to repay. Many of these borrowers now face selling their home to downsize or releasing equity if they’re eligible, which can be very expensive.
It might not be a simple switch however. Lenders are less easy with this type of lending than they once were and borrowers will now face tough questions on their income and spending to assess their affordability and if they can cope in the event of interest rates rising.
Extend your term
If you’re struggling you could consider extending your mortgage term. This means you’ll have longer to pay it off, but be careful as it will also mean you’ll end up paying more in interest over the long run.
For example, if you took a £200,000 mortgage over 25 years, on a 3 per cent mortgage rate this would cost you £948 a month and you’d pay £84,527 in interest to the bank over the course of those 25 years.
If you added an extra five years onto the term however, taking the total length the 30 years, your interest payments would come down significantly to £843 a month – over £100 less than on the original term length.
However, those five years will cost you in the long run – you’ll end up paying the bank an extra £19,028 over the course of the loan.
If you’re thinking of going all the way and moving to a cheaper home, now is not a bad time.
Though there are fewer mortgage deals out there to pick from, plus the hassle of moving while the lockdown is still active in some areas, you can take advantage of the Government’s recent stamp duty cut.
The exemption means most buyers won’t pay any stamp duty up to £500,000 when they move house.
Best mortgage rates and how to find them with This is Money’s help
This is Money has partnered with L&C Mortgages, a firm of independent mortgage brokers who specialise in finding the best mortgage rates and the right deal for you.
To check for the best mortgage deal and speak to an adviser, click here.
Or you can fill in your details online to find out the best mortgage rates for you.