A FAMILY facing a steep rise in their monthly mortgage costs have explained how they managed to keep repayments down.
Rebecca and Phil Pearce, both 42, are saving nearly £200 a month after a shock rise in rates.
Like millions of others, the couple are coming off a fixed deal which they locked in two years ago when interest rates were at record lows.
Until last month, Rebecca and Phil were paying just 1.05% on their £160,000 loan on their three-bed terraced house in Bournemouth.
When they started looking for a new deal, the best they could find was 5.55%.
This meant their repayments were set to spike from £661 per month to £1,099 – an increase of £348.
While Rebecca, who works in teaching, and Phil, an engineer, were able to afford a little extra each month, they needed to keep their monthly mortgage payments below £1,000 to keep on top of household costs.
“There was no way we could have afforded the two-year fixed rate, it was ridiculously high,” Rebecca told The Sun.
“We started looking at other mortgage terms, including a ten year fixed deal, but everything was above £1,000 a month in repayments.”
An estimated 1.4million households are facing higher remortgaging rates this year, according to the ONS and more than half are coming off deals fixed below 2%.
The average two- and five-year fixed deal is now over 6% according to the latest data from Moneyfacts.
It comes after 14 consecutive hikes to the Bank of England base rate, which is used by lenders to set the rates they offer to customers.
The move is designed to tackle stubbornly high inflation – but has left millions of homeowners struggling with rising costs.
Making repayments more affordable
Rebecca and Phil, who are parents to Charlie, 11, and Lily, 7, and Leon, 25, who has moved out, learned they could get their monthly payments down to an affordable level.
That’s after speaking to mortgage advisor Carly Cheeseman at Clifton Private Finance, who said they could do this by extending their mortgage term,
A mortgage adviser or broker is someone who can help you find the best deal on the market, and can help you arrange it with the chosen lender.
The couple had 21 years left on their mortgage after 15 years of paying it down.
They have now settled on a five year fixed deal at 5.5% with Virgin Money, which let them extend the term to 33 years.
The move to extend the term means they have shaved £183 off their monthly mortgage bill.
But the 12 year extension comes at a cost and they will now be paying back the money into their 70s.
While the move takes the pressure off their monthly payments in the short term it means the couple are “back where they started” – their mortgage amount, term and interest almost equalling what Rebecca initially took out 15 years ago in 2008.
Rebecca initially bought the home with an ex-partner for £146,000 with a very low deposit of just £5,000 and an interest rate of 4.19%.
After the couple split Rebecca bought out her ex and she has been paying down the mortgage with husband Phil since they became joint owners, with interest rates coming down year-on-year.
The couple took out equity to do some work on the house and garden during lockdown, taking their loan back up to £160,000 on the property, which was last valued at £320,000.
Back where we started
“It’s frustrating to be getting older and to own your house and see the benefit of paying your way and the debt coming down over all those years – only to now feel like I’m right back where I started when I first bought it,” Rebecca says.
“I’m just thankful we have a home we love and we don’t need to make any massive sacrifices. I really feel for first-time buyers trying to get somewhere at the moment.”
As Rebecca and her husband are both 42, most lenders would not let them borrow across a term of 30 years or more as it takes them above the retirement age, but Rebecca says Carly “worked really hard” to find something the couple could afford.
One of the UK’s biggest lenders, Halifax, this week announced that it has extended its maximum working age from 70 to 75 years old to help borrowers amid rising rates.
If they stick with their current mortgage for its entire term, they won’t be retiring until they are 75.
As a family they are feeling the pinch of the extra mortgage costs.
“Neither of us have had a pay rise since the cost of everything started going up, so we are feeling it,” Rebecca says.
“I work in a school and already teach fitness classes in the evenings and at weekends, so I’m tied in terms of earning any additional income.
“Financially the burden falls on my husband, who’s having to pay the extra amount through working overtime.”
Long term options
Rebecca says she is hopeful interest rates will start to drop over the next few years, giving them the option of remortgaging to a better deal.
“We have peace of mind that it isn’t going to be any more expensive for five years, so the worst case scenario really is that we have to ride this out,” Rebecca says.
“We’re hoping to find a better deal before that though, and then we can start making overpayments with the aim of getting the term back down.”
The couple’s deal has a set early exit fee of 3.5% if they want to remortgage at any point in the next five years, which will cost them about £5,500 and can be added to their mortgage total.
If they don’t leave the deal early, they can look for a new deal in five years.
They can choose to keep the remaining term – which will be 28 years by then, or a shorter term.
Louis Mason, content & communications director at Oportfolio says extending loan terms can be a great way to help customers afford mortgage repayments – but warns it does mean you’ll likely end up paying more interest in the long run.
He says: “This reduction in mortgage costs can free up cashflow in general, so the extra cash can be used to pay for other things like bills, shopping etc.
“However we always ask the client to keep in mind that they’ll likely pay more in interest over the life of the loan.
“Having a longer mortgage will also mean that you have a slower equity build-up.
“Extending a mortgage term slows down the rate that you build equity in their property, which could delay future financial goals like selling and upscaling because you haven’t made enough equity in the property.”
Another option customers facing a price hike can consider is switching to a part and part mortgage – but Louis warns these aren’t for everyone.
He says: “Traditional residential mortgages are usually on either a capital repayment basis, where you pay back the actual loan per month, or an interest only basis where you only pay the interest on the loan.
“However, there is the option to put part of the loan on repayment and the other part on interest only.
“This can reduce your monthly loan commitment by hundreds a month.
“You should always consult a mortgage advisor before making any decisions about this.”
