As the UK’s economy is reportedly on the brink of another recession, here at enact conveyancing we’ve looked into a recent comment made by the chancellor, Jeremy Hunt, that could help struggling homeowners during the current cost-of-living crisis.
‘Stretchy’ mortgages – what are they?
To put it simply, a ‘stretchy’ mortgage would allow homeowners to temporarily extend their mortgage term e.g. from 25 to 35 years, which could “stretch” out the payments over a longer period to make them more affordable.
What would be the benefit of an increased mortgage term?
Extending the mortgage term for struggling homeowners could provide some benefits, including:
- Lower monthly payments: By increasing the mortgage term, the monthly payments can be reduced. This could help struggling homeowners manage their monthly expenses and free up cash for other essential expenses
- Reduced financial stress: Struggling homeowners can feel a lot of financial pressure and stress when they are not able to make their mortgage payments on time. By extending the mortgage term and reducing the monthly payments, they may feel less stressed about their financial situation
- Avoiding your home being repossessed: If a homeowner is at risk of their property being repossessed due to missed mortgage payments, extending the mortgage term could be a solution to help them avoid making missed payments and keep their home
- Improved credit score: By making their mortgage payments on time, homeowners can improve their credit score, which could help them to qualify for better interest rates and other financial products in the future
However, it’s important to note that extending the mortgage term will increase the total amount of interest paid over the life of the loan, which could result in a higher overall cost of borrowing.
What industry experts have to say
CEO of Octane Capital, Jonathan Samuels, commented:
“There are many homeowners across the UK who are feeling the strain of rising mortgage costs this Christmas, and while we wait patiently for economic improvement in 2023 it might be a wise move to try and protect against the risks of missed mortgage payments, and worse still, repossessions.
The Chancellor’s stretchy mortgage suggestion has the potential to provide some temporary relief for struggling homeowners, while affording more time for the Bank of England to get a handle on inflation, and rising interest rates, which are currently being pushed up by wider economic uncertainty and energy costs.”
Current rules on homeowners extending their mortgage term
While the suggestion from Jeremy Hunt of allowing homeowners to increase their mortgage term isn’t essentially something new – currently there are only a couple of opportunities to change your mortgage terms when owning a property.
For first-time buyers, when speaking with your mortgage lender or broker, at the time of making your mortgage application you will discuss what sort of mortgage term you would like to make repayments for based on several factors. For those with lower deposits and income, it may be that your mortgage term is closer to retirement to make the monthly repayments more affordable.
Then, when it comes to remortgaging your home, again you will discuss with your lender or mortgage broker if your affordability has changed as to whether or not you can decrease or need to increase your term.
For those that are currently locked in on a fixed-rate mortgage, it is unlikely that they can increase the mortgage term.
This is because during the fixed rate period, the interest rate and monthly payments are set at a predetermined level, and the mortgage contract usually specifies the length of the fixed rate period. Homeowners are typically not allowed to change the terms of the mortgage, including the length of the term, during the fixed rate period.
Once the fixed rate period ends, the mortgage typically reverts to a variable rate, and at that point, the homeowner may be able to request an extension of the mortgage term, subject to the lender’s approval.
However, it’s important to note that the ability to extend a mortgage term may depend on the specific mortgage product and terms of the original mortgage agreement, as well as the homeowner’s creditworthiness and ability to make mortgage payments. Homeowners should contact their mortgage lender to inquire about the possibility of extending the term of their mortgage.
Finally, borrowers can currently request a term increase, mortgage holiday or interest-only period from their lender, however, the bank does not have to grant it.
How interest rates have impacted homeowners
Since December 2021, the Bank of England has increased the UK’s base rate from 0.15% to the latest rise of 4% on the 2nd Feb 2023. This has been of considerable concern to homeowners that have either had to remortgage or buy their first home all while the cost-of-living crisis has made all other aspects of life more expensive.
But aside from higher mortgage payments, why else are rising interest rates bad news for UK homeowners? This can be for several reasons:
- Reduced affordability: Higher interest rates can reduce the amount of money that homeowners can borrow to purchase a property, which could make it more difficult for them to afford the home they want
- Negative equity: If house prices fall and interest rates rise, homeowners may find themselves in negative equity, which means that the value of their home is less than the amount of their outstanding mortgage. This can make it difficult to sell the property or remortgage in the future
- Lower disposable income: Higher mortgage payments can reduce disposable income, which could impact homeowners’ ability to save money or spend on other things
- Economic uncertainty: An increase in interest rates could also signal economic uncertainty, which could impact homeowners’ job security and overall financial stability
What alternatives could homeowners consider?
A lot of the market instability we have experienced lately was due to the ‘mini-budget’ under the conservative leadership of Liz Truss.
Many industry experts believe the UK’s economy will begin to settle down in 2023, yet for homeowners due to remortgage or who perhaps are looking to move house this year and therefore take out a new mortgage, what alternatives are there to the standard fixed-rate mortgages?
First of all, there are interest-only mortgages. An interest-only mortgage is a type of mortgage in which the borrower is only required to pay the interest on the loan each month, but not the principal. This means that the monthly payments are lower than they would be with a traditional mortgage where both principal and interest are paid.
The principal amount of the loan is typically due at the end of the mortgage term, which is usually between 25 and 30 years. The borrower can choose to pay off the principal at the end of the term or refinance the loan.
Interest-only mortgages can be attractive to some borrowers because they have lower monthly payments and can help borrowers to afford more expensive properties. However, they also carry higher risks compared to traditional mortgages. For example, if property values fall, the borrower may end up owing more than the property is worth, which is known as negative equity.
Lenders typically require borrowers to meet certain criteria to be eligible for an interest-only mortgage. This may include having a high credit score, a large deposit or equity in the property, and a clear repayment plan for the principal at the end of the mortgage term.
Alternatively, homeowners could consider a tracker mortgage which is a type of mortgage where the interest rate is linked to the Bank of England’s base rate. The interest rate on a tracker mortgage is set a certain percentage points above or below the base rate, and as the base rate changes, so too does the interest rate on the mortgage.
For example, a tracker mortgage might be advertised as “base rate + 1%,” meaning that the interest rate on the mortgage will always be 1% above the Bank of England’s base rate.
One advantage of a tracker mortgage is that if the base rate falls, the interest rate on the mortgage will also fall, which can result in lower monthly payments. However, if the base rate rises, the interest rate on the mortgage will also rise, which can result in higher monthly payments.
Tracker mortgages usually have a set term, such as two, three, or five years, during which the interest rate will track the base rate. After the initial term, the interest rate may switch to the lender’s standard variable rate, which may be higher than the initial tracker rate.
It’s important to note that the interest rate on a tracker mortgage can change at any time, so borrowers should be prepared for their monthly payments to go up or down as the base rate changes.
Nothing has yet been confirmed as to whether ‘stretchy’ mortgages are going to be introduced, however, any support towards homeowners that are struggling financially and help relieve the worries of losing their home would be welcomed news for many.
It’s always important to speak to a mortgage broker or lender to weigh up your options and understand what type of mortgage suits your circumstances the most when it comes to remortgaging. If you’re struggling financially always speak to your lender as there may be ways they can support you during your financial hardship.