Navigating your mortgage options

The UK housing and mortgage market has witnessed a rollercoaster ride in the past few years. This phenomenon was fuelled by low interest rates, government incentives like the Stamp Duty Land Tax scheme, and a growing urge amongst many workers to embrace hybrid and home-based working arrangements for a better work-life balance.

After October 2021, prices slowly rose until March 2022, when Russian President Vladimir Putin launched his full-scale invasion of Ukraine. While UK property prices rose a steady 1% a month between the start of the invasion and June 2022, many still feared that the invasion could lead to a downturn in UK house prices.

RISING INTEREST RATES AND INFLATIONARY PRESSURES

Rising inflation, partially caused by increases in the wholesale price of food, gas and electricity following the Ukraine war, has led to the Bank of England repeatedly increasing their base interest rate, resulting in many homeowners across the board and at all stages of their mortgage lifecycle worrying about the effects of rising interest rates and inflationary pressures on their budget.

This has subsequently resulted in a sluggish housing market and led to a decrease in property values for the first time since March 2020. The biggest issues looming over many homeowners with mortgages remain unanswered: ‘How high can interest rates go?’ and ‘What will my mortgage payments be when my fixed rate ends?’ It is impossible to predict what lies ahead with any real certainty. With many mortgage borrowers facing uncertain times, these are a few steps that can be taken, if appropriate.

MAKE A LUMP SUM OVERPAYMENT ON YOUR MORTGAGE LOAN

When it comes to monthly mortgage repayments, three factors come into play: the amount borrowed, the full term of the mortgage and the applied interest rate. Borrowers with capital and interest repayment mortgages see their borrowing level decrease with each monthly repayment. If you can do so, consider making a lump sum overpayment to your mortgage. However, before doing so, checking whether your mortgage incurs a penalty for overpayments is important.

“In today’s tough economic climate, it’s more important than ever to shop around for the best mortgage rate.”

CONSIDER MAKING REGULAR OVERPAYMENTS ON YOUR MORTGAGE

For borrowers who have fixed their rate prior to the increases, it might be worthwhile to consider making regular overpayments to their mortgage, provided that their monthly budget allows for it. This strategy can serve a dual purpose – helping them acclimatise to the increased monthly payments that are inevitably coming down the line and reducing their underlying borrowing faster, ultimately leading to interest savings in the long run. However, before proceeding with this approach, it’s important to check with your mortgage provider whether overpayments incur a penalty.

EXTEND THE LENGTH OF YOUR MORTGAGE TO REDUCE MONTHLY PAYMENTS

If borrowers don’t have the means to make overpayments on their mortgage, it might be worthwhile to consider extending the repayment term. While 25 years used to be the standard mortgage term, higher house prices and delayed retirement ages have led many borrowers to opt for longer terms when buying their home.

Extending a mortgage term can lead to reduced monthly repayments since the original capital sum is spread over a longer period of time. While this may appear attractive to homeowners looking to maximise their borrowing potential, there is a significant downside – these longerterm mortgages are much more expensive in real terms. This is because interest continues to be charged over a longer period, and the total cost of an extended mortgage term can be considerable.

COMPARE DIFFERENT LENDERS AND THEIR OFFERINGS TO FIND THE MOST COMPETITIVE RATES

In today’s tough economic climate, it’s more important than ever to shop around for the best mortgage rate. While many borrowers might be tempted to stick with their current lender or bank, this could prove to be a costly mistake. Whether you’re a first-time buyer or an existing borrower, it’s essential to be aware of your loan-to-value (LTV) ratio.

This is expressed as a percentage and is calculated by dividing the amount of borrowing against the value of the property. Lenders set their interest rates based on LTV bandings ranging from 60% up to 95%, with the lowest rates available to those with a lower LTV ratio.

To get the most attractive mortgage interest rates, even a small overpayment can make all the difference at this time. It’s essential to speak to a professional mortgage adviser, who will undertake a comprehensive review of your situation and explain your options.

FINDING THE RIGHT MORTGAGE FOR THOSE NEARING RETIREMENT

For borrowers who are nearing retirement, there is a range of options available in the mortgage market. In recent years, there have been many developments in this sector, with product ranges growing in both variety and flexibility, albeit at a higher cost than conventional mortgages. When it comes to interest rates, there are several options to consider.

Fixed rates are typically available for periods of between two to ten years, while variable rates may be set by the lender or linked to an external source such as the Bank of England base rate.

Each type of interest rate has its own pricing structure, which will influence the level of monthly payments. It’s important for borrowers close to retirement to carefully consider their options and choose a mortgage that suits their financial circumstances. While the range of products available can be overwhelming, seeking professional mortgage advice will help ensure borrowers who are nearing retirement make an informed decision.

Don’t forget, our professional friendly advisers are on hand to support you and can help you explore all of your options.