How to cope with high interest rates affecting your mortgage

Nicola Kelly 22nd Jun 2023 No Comments

Reading Time: 3 minutes

An Englishman’s home is his castle but being a property owner has never been more daunting with interest rates rising above 6 per cent and increasing annual mortgage payments by £3,000 for the average UK household.

Since rates began rising in January 2022, two million homeowners have seen their fixed deals expire and this is set to rise to 4.4 million by December 2024. So a buyer who took out a 75% per cent mortgage on a £240,000 house two years ago will see their mortgage payments rise from £700 to £1,000 when they re-finance this month.

Banks like HSBC and Santander have temporarily pulled their mortgage products and latest figures reveal 10.9 million people are having difficulty with their mortgage repayments with missed payments rising 33 per cent from 4.2 million to 5.6 million.

The government believes higher interest rates are vital to tackle spiralling inflation and while rates are expected to peak at the end of 2023, they are likely to take years to recede.

So what can you do to get help?

One lady I spoke to remembers living on jacket potatoes and baked beans for months when, 30 years ago, interest rates rose to 15 per cent, and she had to cut her budget drastically.

Whatever your situation using a budget planner is a good start to look at where you can cut flexible monthly costs.

Can you reduce your buildings and insurance costs by shopping around? Last year I saved myself £600 on car and household insurance by doing exactly that.

If you have an endowment mortgage, consider giving it up or selling it off to an investor which will provide you with a lump sum to help reduce the mortgage debt. It is a risk so do get independent financial advice via Citizen’s Advice.

If you’ve lost your job and income unexpectedly, check if you have mortgage payment protection insurance. You might have taken out a policy years ago and forgotten about it, especially if it isn’t with your current lender. There’s lots of circumstances where it won’t pay out but it’s worth checking if you have it.

If you are coming to the end of your current mortgage rate, don’t bury your head in the sand, find out how much you owe and start researching what rates are currently available.

Ben Thompson, Deputy CEO at the Mortgage Advice Bureau: ‘If you move to a new lender you will have to undergo affordability checks and they will look at your credit score so find out what it is and do what you can to improve it.

‘This might mean closing old bank accounts, making sure you are on the electoral roll or looking at your credit limits.’. Natwest offers free credit reports no matter where you bank.

If you’re struggling to meet your next payment, speak to your mortgage lender and come up with a new plan, whether that’s extending the mortgage term (your monthly payments would come down although you’d be paying more for your mortgage), change how often you make a payment or switch temporarily to an interest only mortgage (monthly payments will be much less but they don’t reduce the overall debt and you’ll still owe all the capital you originally borrowed).

Generally, a lender won’t take action until you’ve missed four consecutive payments, but always remember that forcing someone to sell their home is costly and time-consuming and it’s something, especially in the current climate, that they’d prefer to avoid.

If you are still feeling anxious then get advice here or call them on 0808 808 4000.

There is some government support for mortgage interest (SMI) if your claiming benefits including income-related Employment and Support Allowance, Income based Jobseeker’s Allowance, Income Support, Universal Credit or Pension Credit. Go to MoneyHelper.

In Wales some local authorities and housing associations operate mortgage rescue schemes (MRS) to help homeowners avoid repossession and in Scotland the government provides some help through its Home Owners Support Fund. It operates two schemes, Mortgage to Rent where a social landlord buys your home and rents it back to you or the Mortgage to Shared Equity scheme where then Scottish Government buys up to a 30 per cent stake in your home which reduces how much you owe on the mortgage. You continue to live in the home and make lower mortgage payments as a result.

It’s also worth checking if you are entitled to any benefits that might help boost your income.

Alternatively, if you have a furnished, spare room in your home you could earn up to £7,500 a year tax free from renting it out, something that will be particularly attractive to tenants struggling to afford the 4.7 per cent increase in private rental prices.

Check out our guide to making money online here.