Following the recent interest rate rises, borrowers looking to secure new mortgage lending now face the prospect of significantly increased monthly payments compared to recent years. Interest rates have been steadily rising across the last six months and the fiscal announcement from the new Government triggered a major spike in interest rates available across the mortgage market. Mortgage budgeting has become increasingly important as the focus now shifts from how much you can borrow, more towards what you can afford in terms of the monthly payments.
For first time buyers or those looking to move home, increased interest rates may require you to re-evaluate your budget. While mortgage affordability, how much you can borrow, remains largely unchanged with most lenders, how much this will cost has increased significantly. If the monthly payments are not affordable for you, it is not practical to proceed just because a bank is happy to lend you the money.
For those coming up to a remortgage, the situation may be more complex. Adjusting your budget is not a possibility when you have an existing mortgage balance that needs to be remortgaged. Unless borrowers have surplus cash available to reduce the mortgage balance, monthly payments are going to increase when remortaging onto a significantly higher interest rate.
Adjusting the mortgage term is the most significant method of manipulating the cost of the mortgage. The longer the term, the lower the monthly payments as the debt is repaid over a longer period. Most mortgage lenders allow residential mortgage borrowing up to age 70 and a small number of lenders allow borrowing up to age 75 or 80, depending on circumstances and income.
On a purchase, lenders typically allow a maximum of a 35-year or 40-year mortgage term. If payments are still not affordable over the maximum mortgage term or up to your anticipated retirement age, it may be necessary to decrease mortgage borrowing and/or the budget for your new house purchase. On a remortgage, increasing the mortgage term can be considered if the new monthly payments, based on your current remaining term, would be unaffordable. Extending the mortgage term is not a decision which should be taken lightly. However, if it is necessary to ensure the mortgage remains affordable, then doing so can allow you to stay in the property.
Rising interest rates will create challenges for new and existing borrowers. Whether it be reducing your budget or extending your mortgage term, there are solutions to ease the financial pressure caused by increased mortgage rates. Mortgage budgeting – awareness and analysis of what you can truly afford in terms of your monthly payments is as important as ever. If you’re looking to move home, remortgage or you have any mortgage and life insurance queries, we’re here to help with free, professional advice.