How to handle the impending mortgage shock

Help to Buy as a concept has mainly helped large developers and banks more than those it purported to support, the first-time buyers. The problem with the housing market is not on the demand side, but rather on the supply side. We need to build more homes to support the demand, not overheat the market. When the government pushes greater liquidity into an already hot market, and offers higher leverage to first-time buyers (who can get away with a measly 5% deposit), while the rest comes from printed money (QE), basic economics dictates that we are inflating the demand side, not solving the supply side problem of housebuilding.

It is no wonder therefore that many who took out 2% interest borrowing at 90-95% overall leverage on a 2-year fix during Sunak's lockdown stamp-duty-bonanza in 2021 are finding their payments doubled.

Whilst no one wants to pay for more their mortgage, due to the widespread media coverage on interest rates increasing most clients we are seeing have already prepared themselves for a larger monthly payment. In fact a lot of our clients are actually expecting a much bigger increase than the reality. One positive I have seen from clients having to reassess their finances is that it has forced many people to go through their bank statements and get rid of any costs they don't need. Subscriptions are now everywhere for everything and having a real focus on cutting costs means people are now less likely to fork out for things they don't use or need. Whilst some are having to look at options of extending their mortgage term, we are yet to see any clients pushed to the point of no longer being able to afford their mortgage.

At the moment it's not uncommon for me to be speaking to someone coming to the end of a deal that's seen them fixed at under 2% and having to discuss a new deal at over 4%. As you can imagine, even on a small mortgage, that is quite a jump in the monthly commitment. Fortunately, the amount of coverage this topic has received means it is not a shock, in fact, many were fearing a far higher jump in their repayments than transpires. Currently, there are two paths that these borrowers are taking; they either accept the increased payments and justify it to themselves in terms of any increases in income they have had over the intervening years or by cutting other outgoings, the other group is looking to extend their repayment term to lower the monthly commitment but accepting this makes the mortgage more costly overall.

Most borrowers realise they will have to pay a lot more to remortgage now. Many had deals at 2 per cent, sometimes less, and are usually looking at a doubling in their mortgage rate. Extending the mortgage term is the most straightforward option, though it means you'll pay more interest overall.

Five-year fixed rate deals are typically cheaper than 2-year fixes. The stress test for affordability is less strict as well.

The borrowers who can really struggle are those who've had a few missed payments, a CCJ or default since they took out their existing deal. Then the mortgage rate can easily triple.

The best way to handle this new mortgage payment, which is sure to be higher than your current, is to be sure you speak to a reputable broker who specialises in your area. They will be able to find the BEST cost option for you. It will be a bit of a shock, but this will minimise it as much as possible.

Before the rate increases, we were seeing fixed interest rates between 1% - 2%. In recent times it’s common to see rates above 4%. We’re working with average loan amounts between £300,000 - £400,000, and the increase in monthly payments can be significant.

When discussing options with clients we explain the possible ways to reduce their monthly payments if need be. Examples include extending the mortgage term and/or arranging part or all of the loan on an interest-only basis. The latter is typically subject to meeting specific criteria, such as having a minimum amount of equity and/or earning a certain level of income.

For those struggling with their monthly payments, or expecting to struggle once their mortgage renewal is due, it’s hugely important to proactively discuss these concerns with their mortgage lender.

We have had several clients consider different options to reduce their mortgage payments.
One option is to extend the mortgage term if on a repayment basis. This will reduce the monthly cost, however, you would pay more in interest as it is spread over a longer period. You have the option to reduce this in the future when rates reduce, or make overpayments.

Another option to consider is an interest-only payment method as this reduces mortgage payments significantly. However, you need to ensure you can pay off the debt in the future as the loan will stay the same on this basis. With the interest-only payment method, a lot of lenders require a minimum income of £75-100k per annum.

This option tends to be popular for HNW clients as they normally want to keep their payments to a minimum to invest in other opportunities.

A sudden increase in mortgage rates and payments can be a shock to homeowners. The current economic climate has resulted in a surge in interest rates, which has led to many homeowners facing unexpected increases in their mortgage payments.

The percentage rate and payment rise depend on various factors, such as client circumstances, and the type of mortgage. Increases of up to 2%-3% in their mortgage rate for clients remortgaging currently are not uncommon.

To mitigate these rises, some clients are opting to extend their mortgage terms to reduce their monthly payments. Others are putting part or all of their mortgage on interest-only to reduce their monthly outgoings. However, it's essential to note that not all banks are willing to accommodate this approach, nor are they suitable for every borrower. It's essential to speak to your lender or an independent adviser to determine what options are available, ideally around 6 months before any current rate expires.

The optimal path to pursue is to consult a mortgage broker. The reason is, individuals possess unique financial situations that encompass factors such as income, expenses, age, and property equity, among others, a competent broker will consider these variables and recommend a suitable course of action. They will subsequently approach the appropriate lender depending on the best course of action for the given borrower. It is essential to seek guidance from a broker as what may be advantageous and applicable for one borrower may not apply to another, highlighting the significance of tailored advice. Such options can include, but are not limited to, term extensions and interest only

We have seen a dermatic shift in rates and costs in the specialist mortgage sector, with but-to-lets investors jumping from the low 1% range in some cases to 6% plus. This mixed with a traditional low increase in rent incomes has seen a double edge sword. The stress testing ICR rates have been pushed to the limit by lenders making sure coverage and protection are in place to cover the uncertainty of future loan coverage has seen many investors look for an alternative solution - this has resulted in a spike in Service accommodation (rent by the night) style lettings and social housing increase.
The tenants are now suffering from a lack of good quality rental stock available and an increase in new instructions with street limits rentals smashing through the roof in most areas of the UK.
We have seen more creative solutions in the remortgage space where portfolio lending across several properties is effective as the ICR is worked out as a mean average vs individual properties.