Are you struggling to pay your mortgage? There are ways to potentially lower your mortgage repayments and make your loan more affordable month to month. The main two options are to extend the term of your mortgage or switch from a repayment mortgage to an interest-only mortgage. It’s important to stress that doing either of these may mean you pay more in the long run, but they can be useful if you’re currently struggling to make repayments. Increasing the overall cost of your mortgage but reducing monthly repayments may be preferable for some people who are at risk of going into arrears, losing their home, or suffering from a lower quality of life due to high mortgage repayments.
Due to the recent rise in inflation and the cost of living, the UK government has been working with the Financial Conduct Authority (FCA) to help mortgage holders manage their loans. This has led to the ‘Mortgage Charter’ being introduced, which allows people to switch to an interest-only mortgage or extend their term more easily. In this guide, we’ll discuss the options of extending your mortgage term or switching to an interest-only product, both with the Mortgage Charter or by remortgaging. We’ll also explain other ways you may be able to lower your mortgage repayments.
What is an Interest-only Mortgage?
An interest-only mortgage is a type of mortgage where the borrower only has to repay the interest on the loan each month but not the loan itself. Before the Mortgage Charter was introduced, this was typically a long-term option covering the entire term of the mortgage.
As the borrower is only paying the interest on the loan, this means that monthly repayments will be lower than on a repayment mortgage. However, the borrower will still owe the full amount of the loan at the end of the mortgage term. At this point, the loan will then need to be repaid in one lump sum, or the borrower will need to switch to a repayment mortgage or sell the property.
Interest-only mortgages can be attractive to borrowers who need to keep their monthly repayments low. However, it’s important to be aware of the risks involved, such as the risk of negative equity (where the value of the property falls and the borrower owes more than the property is worth). Borrowers may also have difficulties repaying the loan in full at the end of the term, in which case they may need to sell their home. These risks are not relevant if you are switching to an interest-only mortgage temporarily using the Mortgage Charter, as we’ll discuss later.
Switching to an Interest-only Mortgage with the Mortgage Charter
The government and the FCA have introduced the Mortgage Charter to help people who are struggling to afford their mortgages. The Mortgage Charter offers two options to help these people, the first being a short-term fix of switching to an interest-only mortgage for six months.
During these six months, you’ll only be paying the interest on your loan each month but not the loan itself. Therefore, your monthly payments will be considerably lower (how much lower depends on your mortgage rate and the size of your outstanding balance).
At the end of the six months, you’ll automatically switch back to your previous repayment mortgage, however, your monthly payments will be slightly higher as you’ll need to pay off your loan over a shorter period of time (six months shorter).
When switching to an interest-only mortgage for six months with the Mortgage Charter, you won’t need to pass any affordability checks and your credit score won’t be affected. However, if you were to choose to stay on an interest-only mortgage for longer, you may need to go through the normal mortgage application process and your credit score may be affected.
What Does it Mean to Extend Mortgage Term?
To extend your mortgage term means to increase the length of time you have to repay your mortgage. For example, if you have 20 years left to pay off your mortgage, you could extend this to 25 or 30 years. This can be done by adding more years to the term of your current deal or by switching to a longer-term product with a new lender.
The most common reason to extend your mortgage term is to reduce your monthly repayments. As you’ll be paying off your mortgage over a longer period of time, the monthly repayments will be lower (the longer you increase the term, the lower your monthly repayments will be). However, the overall amount you’ll pay for your mortgage will usually be higher because you’ll be paying interest on the loan over a longer period of time.
Remortgaging to Extend Your Mortgage Term
If you are thinking of extending your mortgage term, it may be a good time to see what deals are available to you from other lenders. When remortgaging to a longer-term mortgage, you’ll have to pass the new lender’s affordability and credit checks, but you may be able to secure a better rate. We recommend talking to one of our friendly advisors to see if this is the right option for you.
Extending Your Mortgage Term with the Mortgage Charter
As mentioned, the Mortgage Charter provides two options to make your mortgage more affordable, and extending the term is the second of these two options.
If you choose to extend your mortgage, the Mortgage Charter allows you to do this with your current lender (providing they’re signed up to the scheme), without affordability checks or affecting your credit score.
Unlike the interest-only option, this is meant to be a long-term solution and therefore you won’t need to reduce your term in the future. However, you will be allowed to reverse the change within six months with no questions asked. You may still be able to reverse the decision after six months, but your lender will likely need to do affordability checks to ensure you can manage the higher repayments.
Should I Switch to an Interest-only Mortgage or Extend the Term (Using the Mortgage Charter)?
If you’re struggling to pay your mortgage, we recommend talking with one of our advisors to discuss your options in greater detail. We may suggest you take advantage of one of the Mortgage Charter options and we’ll be able to help you decide which is right for your situation.
In general, if you’re in need of a large reduction in your mortgage payments over a short period of time, then switching to an interest-only mortgage may be the right choice. In most cases, this will reduce your payments much more than extending your term, but you’ll need to be confident that you’ll be able to handle the higher repayments after the six months is up. And remember, your repayments will actually be slightly higher than they are now after the support ends.
If you’re looking for a longer-term option, then extending your mortgage term may be the right choice. This won’t usually reduce your monthly payments by as much as switching to an interest-only mortgage, but you have the option to keep the reduced repayments for the entire term of your loan, making it more affordable for years to come. Remember, however, that this will increase the overall cost of your mortgage.
Other Ways to Lower Your Mortgage Repayments
There are other ways to potentially lower your mortgage payments that we’ll discuss during your free appointment. Let’s have a quick look at these options to give you a better idea.
Get Off the Standard Variable Rate
Are you on your lender’s Standard Variable Rate (SVR)? This is perhaps the most important thing to check if you’re struggling to pay your mortgage. Borrowers are typically switched onto the SVR at the end of a fixed rate or tracker period if they don’t remortgage. This could be just 2 or 3 years after you started your deal in some cases. The SVR is usually the highest rate you can be on, and switching to a new fixed-rate deal should be a priority if you’re trying to save money on your mortgage.
Look for a Cheaper Mortgage Deal
If you’re on a tracker mortgage or within six months of the end of a fixed-rate period, you may be able to remortgage to a new lender or product with a lower rate. However, this is largely dependent on your circumstances and the state of the mortgage market. Depending on when you took out your mortgage, your new rate may currently be higher than your old one, but it’s still a good idea to find out what deals are available to you from across the market.
Overpay Your Mortgage
If you have available funds, most lenders allow you to overpay your mortgage by 10-20% each year. Doing this can reduce your monthly repayments and the overall cost of your mortgage.
Consider an Offset Mortgage
Offset mortgages allow you to offset savings against your mortgage loan to reduce the amount of interest you pay on it. If you want to preserve your savings for the future, and therefore you don’t want to use them to overpay your mortgage, then an offset mortgage could be a more suitable option for you. To learn more about these products, please read our guide, Offset Mortgages – Could You Save Money on Your Mortgage?
The Bottom Line
If you’re struggling to pay your mortgage, there are options to reduce your repayments either temporarily or permanently. The new Mortgage Charter allows you to either switch to an interest-only mortgage for six months or increase the term of your mortgage without affordability checks or credit score implications. There are also other ways to reduce the cost of your mortgage, such as remortgaging off of a Standard Variable Rate, overpaying your mortgage, or switching to an Offset Mortgage. Hopefully, this guide has helped you to understand your options, but we recommend speaking to one of our expert advisors to discuss all your options before making a decision.
At Michael Usher Mortgage Services, we’ve been helping our local community for over 30 years! We’re not affiliated with any particular lender, so we can access a comprehensive range of mortgages from across the market to find a deal that suits your needs. We’ll guide you through the process and liaise with your lender, estate agent and solicitor to ensure your application goes as smoothly as possible, and we can also help to protect your mortgage with our FREE Insurance Service.
Talk to one of our friendly mortgage advisors for free to get going quickly. Our head office is on Frimley High Street, but we can also help you remotely via phone or video call if you’d prefer. We look forward to chatting with you!
Talk to a mortgage advisor for FREE
Your home may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. The precise amount will
depend on your circumstances but will be agreed with you before
proceeding.
