Help is available for those who can't afford their mortgages

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Mortgage rates have rocketed over the last year (Image: Getty Images/iStockphoto)
Mortgage rates have rocketed over the last year (Image: Getty Images/iStockphoto)

It was another grim Thursday for homeowners as the Bank of England raised interest rates to 5.25%. And that means more difficult choices for people with mortgages.

I have no doubts whatsoever that this is the single biggest concern for millions of readers. Every week I’m flooded with enquiries worried about the options available to them.

The good news is the Government has negotiated a series of options for mortgage holders designed to take a bit of the heat off them while we weather out the worst of the cost-of-living crisis.

Except… well, I don’t want to be a Grinch, but the proposals already existed as options for lenders anyway. They’ve just been publicised a bit more widely so we are all more aware of our rights. The fact remains that lenders can – and should – get creative if you are worried about paying the bills.

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. Here’s my guide.

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What does this mean for me and my mortgage?

According to website Moneyfacts, the average fixed year deal for mortgages has now hit a whopping 6.85% for a two-year deal, with a five-year average deal at 6.35%. What this means for you depends on a range of factors, but on average a mortgage could cost over £3,000 more a year.

I’ve been contacted by loads of readers who tell me they have received letters telling them that their mortgage interest will increase from 1% or 2% to a terrifying 7%. As worrying as it is to receive these letters, don’t panic. This is just what happens if you come to the end of your existing deal and don’t arrange a new one. You will automatically be put on to a "standard" rate – usually pretty rubbish. This does not mean it’s the best and only option for you.

If you’re worried about getting through the next few months, 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 just allow you to stop payments while you get back on your feet. Ask if this will impact your credit score though.

Start with your existing lender

Many lenders have gone in to a total panic about the interest rate rises and the deals they have on offer. When the dust settles a bit after the BoE announcement, things should be a bit calmer so the market stabilises and you have a clearer idea of what options are available for you. But don’t wait until your deal comes to an end about the options available. Your lender will need to understand more about your financial situation, so take some time to write down what the next few years might hold in terms of your job and any significant life changes that might be on the horizon.

Of course, if you don’t want to spook them, speak to an organisation like Citizens Advice or Shelter. They have tons of useful guides and information on their websites too. If your situation isn’t dire, then consider chatting to a mortgage broker or financial adviser for an assessment of your options. This will cost you a fee – but it’s worth it for practical advice and peace of mind.

Let’s have a look at the options that might work for you if you are worried about paying the bills.

Offset mortgages

If you have some savings, then an off-set mortgage might be a good option. These are a little tricky to explain, but think of this as a way to ‘link’ your savings with your mortgage to reduce your interest. Say you owe £300,000 and you have £40,000 in savings. The lender agrees to reduce the amount you owe interest on to £260,000 as long as you keep that £40,000 untouched. This reduces the amount of interest you owe However, if you dip in to that £40,000 then the amount you owe will increase.

Interest-only mortgages

An interest-only mortgage does exactly what it says on the tin. You only pay the interest on the mortgage but not the cost of the property itself. The obvious problem here is you will not end up owning the property unless you have an alternative way of paying off the debt. A lender will usually want to know how you intend to do this too. However, if this is a temporary option, then the lender may allow you to switch to an interest-only deal temporarily.

Extending your term

Extending the term of your mortgage may be an option with some lenders. Your payments will reduce, but the amount of interest you pay will ultimately be higher. You may also face challenges if the new term takes you past what your lender thinks your retirement age will be. Be prepared to answer these tricky questions.

If you are in arrears

Okay, let’s tackle the options if things are a bit trickier. Your lender may consider the option of "capitalising the arrears". This is where they agree to add your arrears to the amount you owe on your mortgage. Inevitably, payments will 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. This takes time though, so speak to the lender about what happens while this takes place.

Big Four banks made £20billion in 9 months as households battled interest ratesBig Four banks made £20billion in 9 months as households battled interest rates

Other alternatives

There are always other options though. Many of my friends are taking in lodgers or students to help them pay the bills. There are a range of websites where you can find people who want regular accommodation a few days out of the week, so you don’t have to sacrifice your space all of the time. Take some advice though on your rights if things don’t work out.

If you have a desirable or unusual property, you could hire it out to film and television studios or advertising companies for a few days. There are agencies specifically for this, so you don’t have to spend a fortune to market the property. A friend of mine just got paid £1,000 for two days of filming in his ex-council house in London for an advertisement. And they painted his walls too!

  • Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist.

Martyn James

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