Marathon mortgages, cutting pensions and raiding savings: how homeowners are coping as mortgage rates hover at their highest levels for 15 years.
Although mortgage rates have started to come down after continuously increasing since the start of 2022, mortgage costs are still sky high.
The average two-year fixed rate now stands at an eye-watering 6.47% while five-year fixes are at 5.97%, according to data from Moneyfacts.
This means that anyone remortgaging after their fixed rate has ended will get a shock as their monthly mortgage payments shoot up.
And first-time buyers are having to budget for higher mortgage costs than they might have originally expected.
To keep the costs at manageable levels, borrowers are doing what they can.
Research from KPMG’s latest Consumer Pulse survey found that:
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18% of mortgage holders have used their savings to reduce their outstanding mortgage balance
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16% have switched to an interest-only mortgage
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12% have increased their mortgage term
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And 8% have downsized to a cheaper home.
A worrying figure is that another 11% have said they are paying less into their pensions to cope with higher mortgage costs, while a further 20% are considering doing this, which means they could have less money to live on in retirement.
‘The cost of living and rising interest rates has made life all the more difficult for aspiring buyers and existing homeowners alike,’ says David Hollingworth from mortgage broker London & Country Mortgages.
‘The rapid increase in mortgage rates from the historic lows of only a couple of years ago means that borrowers are facing much higher mortgage costs. Affordability is therefore under fire.’
Marathon mortgages
The number of homeowners choosing to take out ‘marathon mortgages’ with repayment terms of 35 years or more – way beyond the standard term of 25 years – to make their monthly payments more affordable has surged.
Data from credit reference agency Experian shows that a quarter of homeowners under 30 have a mortgage with a term of 35 years or more compared to just one in 10 in 2020.
This means they could still be paying back their mortgage when they’re close to retirement.
Emily Summersgill took out a marathon mortgage from Nationwide through London & Country when she bought her first home.
‘As a first-time buyer I wanted to make sure I had absolute certainty that I could pay both my mortgage and all the new bills that came along with being a homeowner,’ she says.
‘Although I knew my monthly outgoings and that I could afford those, I wanted to be sure I always had enough surplus income to pay for the unexpected – like broken down boilers and leaking pipes. I set my mortgage term at 40 years – the maximum possible and within my retirement age.’
While choosing a lengthy mortgage term may be the only way some people can afford to borrow the amount they need, there are downsides to be aware of, warns Hollingworth.
He says: ‘There is a price to pay as the interest payable over the life of the loan will increase substantially. Shifting to a longer term could add tens of thousands of pounds in interest.
‘For example, a £200,000 25-year mortgage at a rate of 5% would cost £1,169 a month and total interest would amount to £150,754.
‘Over 35 years the payment would drop to £1,009 but the total interest would be £223,940.’
Fortunately for Summersgill, while she took out the 40-year term to be sure she would always be able to afford her mortgage, she has been able to overpay to keep the overall interest costs down.
‘After completion I changed my direct debit so that I was overpaying each month as if I had taken out a 25-year mortgage,’ she adds. ‘That left me able to drop down to my minimum 40-year payment as and when unexpected costs arose but, for the most part, I’ve actively overpaid to get the balance down quicker.’
Other ways to reduce mortgage costs
Many of the ways borrowers have been making their mortgage more manageable have downsides.
Switching to an interest-only mortgage, for example, will also increase your overall interest costs.
While you’re paying the interest, the amount of mortgage debt won’t shrink and you’ll still need to somehow pay off the loan at the end of the mortgage term.
There are other things you can do that have fewer negatives, though. ‘Arguably, the first place to start in managing payments is to consider whether you could be getting a better deal,’ says Hollingworth.
‘As you approach the end of a current deal, it’s a good idea to get ahead and have an option in place to avoid slipping onto a lender’s standard variable rate, which can be well in excess of 8% and even above 9%. It’s possible to secure a deal up to six months in advance.’
If you can afford it and your mortgage deal allows, you could also overpay if you’re currently still on a relatively low fixed rate, so that your mortgage balance is as low as possible by the time you have to remortgage at a higher rate.
This will help you to get used to spending more on your mortgage payments each month too.
Key takeaways
- With mortgage rates still high, borrowers are doing what they can to be able to afford their mortgage
- Options they’re choosing include extending their mortgage term and switching to interest only
- A quarter of young homeowners now have mortgage terms of 35 years or more
- Many of these options have downsides but there are other things you can do to put yourself in a better position