With house prices in the UK continuing to rise above earnings growth, mortgages are becoming increasingly unaffordable. Mortgage payments take a bigger % of disposable income than ever before. For first time buyers it can be difficult to get on the property ladder at all; this is especially true in areas like the South. However there are certain things that can be done to make mortgages more affordable.
1. Remortgage existing mortgage deals.
Many homeowners get a mortgage from a lending institute and then are willing to stay with them for the time period of the mortgage. It is a bit like staying with the same electrical supplier because it is too much hassle to switch providers. However unlike electrical suppliers switching mortgages to better deals can make a huge difference to your monthly outlays. For example if you are on a lenders Standard variable Rate, it it quite possible to find deals like tracker mortgages, which offer upto 1-2% lower rates. This is the most significant action you can take to retain the affordability of mortgages. It is definitely worth spending time to compare different mortgage quotes to find the best deal. However it is important to bear in mind that many mortgages have tie in periods where it is difficult or expensive to switch. It is worth remembering the date at which you can switch and make sure you don’t lose out by paying a higher interest rate.
More on Remortgaging
2. Interest Only Mortgages.
This is a controversial decision. Interest only mortgages will definitely reduce your monthly mortgage payments; this is because you only pay the interest component on your mortgage loan and no capital repayment. However taking out an interest only mortgage has significant disadvantages.
At the end of the mortgage period you will still need to payback the amount that you borrowed.
In the long term you will need to contribute to an alternative investment scheme to be able to pay back the mortgage. This means you are not reducing your total payments, but just switching how you make the payments.
In the beginning of a mortgage term the % of capital repayments is usually very low. Therefore this means for the first few years the savings will be relatively small.
Despite these 3 points it is worth bearing in mind that interest only mortgages can be beneficial for reducing mortgage payments in the short term at least. After a few years when your income increases you will be able to switch back to a standard mortgage repayment.
3. Increase the Length of Your Mortgage Term.
If your mortgage is a standard 25 year mortgage an easy way to save payments is to increase the time period of repayment. A longer time period will lead to significant savings on the monthly bill. This is because it enables the repayments to be spread over a longer time period.
The major drawback is that the overall cost of the mortgage will be higher. This is because with a longer mortgage term, interest has to be paid for longer.