Homeowners weighing up forbearance options in light of rising interest rates should be making cuts to their subscriptions before they consider making changes to their mortgages, brokers have said.
This month, chancellor Jeremy Hunt and the Financial Conduct Authority repackaged existing guidance for lenders on the options available to them if a borrower paying off one of their mortgages says they can no longer afford it.
With inflation at a 41-year high, wages stagnant and the average two-year fixed rate on a mortgage now 5.84 per cent, many borrowers will feel the pinch next year if they locked into two-year rates at historic lows last year.
Switching a borrower from a repayment to an interest-only mortgage means they only make payments towards the interest part of the mortgage, rather than towards the capital borrowed as well, partner at Addleshaw Goddard, Rosanna Bryant, explained.
“They’ll need to extend the term of the mortgage, increase their payments when they come out of interest-only, or put a payment plan in place - though this last option can be costly,” said Bryant.
The FCA also mentioned “forbearance at scale”, suggesting lenders should adopt digital tools to make the option of moving to interest-only payments easier to access.
UK Finance said about 1.8mn borrowers are due to refinance next year, and the number of households to fall into arrears will likely reach 98,500 in 2023.
A number of brokers have dubbed the interest-only option both a short-term relief and a long-term pain, saying other options - such as cutting down on ‘nice to haves’ - need to be looked at first.
“Many of us are more financially stable than we think we are when we look closely and changing to interest-only or taking payment holidays could just delay the problem for many, rather than solve it,” said mortgage and protection adviser at Xpressmortgages, Carmen Green.
Green said in the months and years following the mortgage payment holiday put in place to assist borrowers during the pandemic, “many people” she spoke to admitted to taking the payment holiday as precaution.
“They weren’t actually financially impacted by the pandemic in the end. They could have managed without the payment holiday. I wonder how many of those people have made an attempt to clear those arrears since.”
Lenders will need to filter claims for the forbearance option, Green said, to ensure only those that need to go on an interest-only mortgage do.
“I will be the first to admit, when I take the time to look closely, my lifestyle is full of luxuries that I now consider necessities. Be that my gym membership, TV subscriptions, the latest technology, hair and beauty maintenance, brand new clothing, aesthetic homewares, indulgent food and drink and so on,” she added.
