Are you finding it tough to meet your mortgage repayments? Here are some temporary fixes that could help reduce the burden.
What do you do if you're a homeowner and you find your mortgage repayments are more than you can comfortably afford?
Well, there's no easy, pain-free solution. You're going to have to repay your mortgage debt some time. But there are some temporary fixes that may help you until your finances are in better shape. Here they are:
1. Re-mortgage and keep re-mortgaging
Firstly, if you're paying your lender's standard variable rate (SVR), and many of us are, you should be able to find a much more competitive deal.
At the moment SVRs range between 6.04% and a staggering 8.30%. Taking the middle ground, if you're currently paying interest at a rate of say 7.19% -- based on borrowings of £150,000 over 25 years -- you'll be paying £1,078.42 each month. But make the smart move by re-mortgaging to a typical 2 year fixed rate loan of 5.49% and you'll only be paying £920.24. That's a saving of £158.18 each month!
I've called this a temporary fix because it's likely your new deal will include introductory rates if you go for anything other than a variable rate. The terms will almost certainly be less generous when the introductory period ends, so it makes sense to re-mortgage again after that. Don't forget that each time you do so, you may need to pay arrangement, legal and valuation fees. Make sure these costs are not prohibitive first.
2. Extend your mortgage term
It may be possible, if you negotiate with your lender, to extend the term of your mortgage to reduce your monthly repayments. But remember by repaying your mortgage debt over a longer period the total cost of your borrowing will be greater. Again, this is best used temporarily until you can afford to pay a bit more.
If you're a first time buyer you could consider applying for a mortgage with a term that extends beyond the standard 25 years. Taking the same deal again, if you borrow £150,000 over 35 years, instead of costing you £920.24 each month, your repayments will reduce to just £804.54. And some lenders even allow mortgages over a 40 year term.
Iif you do go down this route, you should probably go for a flexible mortgage which allows you to make overpayments so your mortgage doesn't actually end up running for the full 35 or 40 years. You don't want to be forced into delaying your retirement because you still have an outstanding mortgage debt beyond your normal retirement date.
3. Take out an interest-only mortgage
(Or if you already have one, temporarily stop payments into your repayment vehicle).
Taking the same example mortgage deal but this time on an interest-only basis the repayments can be cut dramatically from £920.24 to just £686.25.
This might sound great in theory, but of course with an interest-only mortgage you are paying just that, interest only, and none of the capital. Normally, you would use a repayment vehicle, such as an ISA or endowment, alongside your interest-only mortgage. The idea is that over the mortgage term your investment plan performs well enough to reach the target of £150,000 so the capital can be repaid at the end.
Now you could temporarily stop contributions into your investment plan until the bad patch is over and your finances are looking healthier. Note the emphasis here should be on temporarily. This is not an ideal strategy, but a short-term opportunity to reduce your outgoings if you've overstretched yourself. You must resume payments into your investment plan as soon as you can afford it or you could land yourself with a major shortfall when your lender asks to be repaid.
I suggest when you're back on an even keel you consider moving to a repayment mortgage where you chip away at the capital as you go. And if you choose a flexible mortgage, you'll have the option to make overpayments allowing you to compensate for falling back earlier on.
4. `Rent-a-Room'
If you have a spare room, you could consider taking in a lodger to boost your income. If you let a room in your own home, you can receive up to £4,250 a year tax-free through a government scheme called `Rent-a-Room'. The proviso is that the room must be furnished and part of your main property.
Even better you'll receive the exemption automatically as long as the income from letting a room is less than £4,250. There's no form filling to qualify for the scheme which is always a bonus. And if you receive more than this you just need to notify the tax office. This means you can earn over £350 per month tax-free which should help to lighten the mortgage load. And once you're up straight again you can always kick your lodger out (in the nicest possible way)!
Don't forget, if you just need to rein in your outgoings for a few months, you could try asking your lender for a short repayment holiday until you're back on track. In any case, if you're facing difficulty your lender should always be your first port of call. According to the Council of Mortgage Lenders, in the first half of 2007, 125,100 mortgages had slipped into arrears of at least three months. Make sure you don't become one of the statistics.
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