Despite enjoying more than five years of record low interest rates, the squeeze on real incomes over the same period has left many homeowners struggling to keep on top of their monthly repayments. Over 18% of homeowners with a mortgage admitted they have had to take action of some sort to carry on meeting their payments, according to a new survey conducted on behalf of loans and mortgage provider Ocean Finance.
Around one in 12 (7.9%) respondents revealed they have had to switch to an interest-only mortgage in the last three years. This product sees the customer paying off the interest on the loan every month, but not repaying any of the capital, which makes the monthly repayments cheaper. However, this means that at the end of the term they do not own the property and will need to find a lump sum to repay the debt, perhaps by selling their home.
Another step taken by close to one in 12 (7.6%) respondents is to extend the term of their mortgage. This might mean extending the period of time they have to repay the loan from an initial 25 years to as much as 40 years. While this means they should pay less each month, it is likely to see them paying more overall due to the interest they will continue to be charged over the extended period of the mortgage. A longer mortgage term may also mean people have to rethink their future plans, such as working later in life to continue repaying their mortgage, rather than retiring.
Just short of one in 20 (3.8%) homeowners revealed they had agreed with their lender to make temporary lower payments. Meanwhile, 2.3% of homeowners surveyed said they were taking a temporary holiday from making payments.
Ian Williams, spokesman for Ocean, commented:
“While repossession figures have been low, this has masked the real struggle that many borrowers have had to keep paying their mortgage. As incomes have been squeezed over the past few years, one in six borrowers has had to find a way to reduce their monthly payment. Switching to an interest-only mortgage or extending the term are both being used as a way to lower repayments. While both of these can help provide short term relief and may serve to keep the roof over people’s heads, it may be that this is simply storing up problems for the future.
“In addition, with the Bank of England currently predicting that it expects to start to raise the base rate of interest in the middle of next year, more homeowners may find that they start to struggle - especially if they are still on a standard variable rate or tracker mortgage. It might therefore be worth their while speaking to their existing lender or a mortgage broker about whether they could benefit from switching to a new mortgage now.”
