By Martin Lewis
UK interest rates are at a 325-year low, at 0.1%. In our normal times that would mean super-cheap mortgages, yet we don’t live in normal times. Lenders have toughened up their acceptance criteria so rates are cheap, but tough to get. And many are struggling to pay, so the regulator has confirmed ANOTHER three-month extension to mortgage payment holidays. All in all, there’s a lot to think about, but get it right and savings could be huge…
Mortgage payment holidays have been extended until 31 October.
On Thursday 4 June, the Financial Conduct Authority’s new rules came into play that extend mortgage payment holidays. These do two things:
Mortgage holders who haven’t yet applied for a payment holiday have until 31 October. The application deadline was 20 June, but that’s now been extended to 31 October. So, those who were holding off applying, have a bit more time to decide as to whether they need it or not. The ban on repossessions has been extended until this date too.
Mortgage holders already on a payment holiday should be able to extend it for a further three months. If you can’t start making payments on your mortgage once your initial deferral comes to an end, you can ask to extend it or have a partial payment holiday. If the lender thinks this would land you in financial difficulty, it’ll be able to deny the payment holiday but should offer other help.
A mortgage holiday only defers your payments. You still have to catch up later, and crucially interest still accrues during the payment holiday. That means once you start repaying, you’ll pay more than you were. Plus, although mortgage payment holidays won’t go on your credit file it can still affect your ability to get future credit as lenders can look at other factors such as open banking or your payment history to see you’ve had a payment holiday. What’s still open to question is how much this will impact your ability to get future deals.
So, if you’re really struggling with finances and need it, then do take a mortgage payment holiday, both to help cash flow and because if you ended up missing payments without agreeing a holiday it’ll destroy your ability to get a future cheap mortgage. Yet if you don’t need it, don’t do it – it’s not worth it, or at least minimise it, and get a partial repayment holiday.
Check if you can cut the cost of your existing mortgage.
Mortgage rates are still very cheap. The big issue is to get a decent deal, or even a deal at all, you’ll need a decent chunk of equity in your house. Those with less than 10% equity will struggle yet if you do have equity there are two-year fixes from 1.14% if you’ve decent equity and five-year fixes from 1.35%. For someone on a typical 4% standard variable rate with a £100,000 mortgage there’s a saving of £1,800/year in repayments, switching to a two-year fix at 1.14%.
Three steps to see if you can cut mortgage costs.
- Ask your existing lender what its best deals are. As you’re not switching between lenders, you may not need to pay costly fees – and it can set a benchmark for what to beat.
- Use a whole of market comparison site to benchmark deals. Use one that includes all deals, including ‘direct only’, those that aren’t offered by a broker. These include my www.mse.me/mortgaebestbuys. That also automatically factors in fees too – as the smaller your mortgage, the bigger the impact of fees.
- Use a mortgage broker to finesse which is the best deal. What really counts is not ‘what’s the cheapest mortgage’ but ‘what’s the cheapest mortgage I’ll be accepted for’. This includes affordability and credit scoring too. And right now, it’s tougher for many, as if you’re on furlough, expect them to use that as the income to calculate affordability. Plus, sadly, if you’re in one of the industries which is harder hit, like hospitality or travel, again that can make things tough.
Yet the information about which mortgage will accept you isn’t available to the general public. That’s where a good fee-free broker can help as they have that information.
Should you go for a fixed or variable rate.
The advantage of a fix is you get price and budgeting certainty that the rate won’t move for a set time – so if that’s important for you – which it is for many right now – err on the side of fixing, and fixing for longer. Of course things could get cheaper – so this is more about peace of mind you know what you’ll pay. Whereas variable deals move with the UK interest rate (and sometimes just at the provider’s whim). Generally, you pay a little more to fix, but not much.