Is it time to re-think your mortgage commitments?
How to review your mortgage options
Reviewing your loan commitments now can help lower your expenses.
Mortgage market view
Following 14 consecutive interest rate rises, the Bank of England base rate sits at 5.25% (5 September 2023). For many UK property owners, this has been unwelcome news as the higher rates have significantly pushed up mortgage costs.
While we have subsequently seen some fixed rate reductions over the last few weeks, mortgage costs are still putting increased pressure on many household budgets. With rates projected to continue to rise later this year, now is a good time for mortgage holders to review their mortgage options and shift towards a mortgage plan that is best adapted to a higher interest rate environment.
Below are a few ways clients are currently reviewing their mortgage options.
Consult the Mortgage Charter
The government has been working with the Financial Conduct Authority and lenders to put the Mortgage Charter in place, which offers support for UK mortgage holders.
As part of the Mortgage Charter, if you have a repayment or part-and-part mortgage, you can apply to reduce your monthly payments by either extending your mortgage term or switching to interest-only for six months.
You can apply for either of these options without having to undergo a new affordability check, and we won’t report it negatively to credit reference agencies. The process is on an execution-only basis, therefore no advice is provided.
It’s important you understand that while this allows you to reduce your mortgage payments, it will increase the overall cost of your mortgage as there’ll be more interest to pay. You’ll also have higher repayments when you go back to your original repayment plan or mortgage term.
Your mortgage term
If you currently sit on an amortising schedule (this means your mortgage payments cover both capital repayment and interest charges) and originally took a reduced mortgage term, maximising your monthly mortgage budget, then you may benefit from discussing potential changes to your mortgage’s term with your mortgage lender.
Since UK interest rates have risen significantly, many mortgage customers have found their original budgets are being stretched or exceeded. While increasing your mortgage term means you will pay more over the overall term, it can mean that your monthly payments decrease, which can help relieve some pressure on your monthly expenses.
An interest-only mortgage
An interest-only mortgage in the UK is a type of mortgage where your monthly payments only cover the interest charge on the loan, rather than both interest and capital repayments. This results in lower monthly payments.
Historically this type of mortgage strategy has been popular for those who either don’t have a steady monthly income or receive most of their income in lump sums, such as clients who receive low monthly drawings with large sporadic distributions, or clients who have a reliable repayment strategy, such as a discretionary investment, to clear the mortgage balance when the mortgage term ends.
While taking on an interest-only mortgage allows you to pay relatively low monthly payments, you will still need to re-pay the capital loan by the end of the mortgage term. Without a repayment strategy to pay off your mortgage, you may well have to sell your property and there is always a risk that you may not receive enough funds from the sale to repay the loan.
Making an overpayment
If you have cash savings that are surplus to your short-term needs, then you could consider overpaying on your mortgage principle. This can be a quick and easy way to reduce the outstanding balance and potentially lower your future payments.
If you are considering an overpayment on your mortgage, you should first review your mortgage terms. Depending on the rate and provider, many mortgages come with an early repayment charge. It is also worth noting that many providers, such as Barclays, require you to go through a full mortgage application if you were to ever need the funds again.
An offset mortgage
Rather than seeking to use all of your savings to pay down a mortgage balance, Barclays offers an offset mortgage solution.
Offset mortgages let you link your current and savings accounts to your mortgage. We offset the total balances of your linked accounts against the amount you owe on the mortgage each month, and then work out your mortgage interest on the lowered balance.
Offset mortgages can lower your monthly payments or reduce your mortgage term. Here’s an example – if you have a mortgage balance of £100,000 and offset £20,000 in savings, you will only be charged interest on £80,000. That saving can be used to lower your monthly payments or shorten your mortgage term.
While you won’t earn interest on the current and savings accounts while they’re linked to the mortgage, an offset allows clients to retain monies for instant access in case of a ‘rainy day’.
While product availability varies depending on the lender, type of mortgage, loan-to-value (LTV), and other factors, it is very important to work through your options.
If your rate is approaching the ‘product end date’ and is currently with Barclays UK, we allow for a 180-day review period to ensure you can run through options prior to moving onto the general follow-on rate.
If you are re-mortgaging to Barclays then a mortgage offer lasts for six months from date of submission. This allows you the time to review rate options well in advance of your current deal ending.
We always look to ask clients what their ‘Mortgage Monthly Budget’ is. This helps to understand the parameters for the lending.
Within this process we suggest that clients work through their fixed and voluntary commitments. We have found that many clients discover that they either have continued to make payments that they were meant to cancel or are paying for memberships that they never use. Conducting regular financial reviews can help rationalise your spending and make more monies available.
Are you struggling to cover mortgage payments?
If the options above are not applicable to your situation and you either predict you will or have reached a point where you are struggling with mortgage payments then we strongly recommend that you speak with your lender as soon as possible.
Never look to suffer in silence. Many lenders can offer ways to help and have options available to clients. If you would like to talk through options with Barclays, then please contact your Wealth manager or a Barclays Specialist Mortgage advisor. We are here to help.
Things to consider
Subject to application, financial circumstances & borrowing history. Terms and conditions apply.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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