A reader who has just been made redundant is asking how to keep up with a £2,981 monthly mortgage payment after losing their income, in a question answered by broker David Hollingworth in a mortgage advice column.
The reader received three months' salary as a redundancy payment but said recruiters had warned that finding a new job at the same seniority level could take longer than that. They and their wife have two young children, and their wife works part-time, meaning most of the mortgage has until now been paid from the reader's salary.
The couple are just over a year into a five-year fixed-rate mortgage with a 20-year term remaining, on a rate of 4.78 per cent. They have some savings set aside for emergencies but are reluctant to run through them quickly, and said most of their wealth is tied up in pensions. The reader asked whether there was any way to pause or reduce the payments.
Switching to a cheaper rate unlikely to help
Hollingworth, who works for the mortgage broker L&C, said the mortgage is typically a household's single biggest outgoing. He cited recent L&C research in which more than 40 per cent of respondents said the mortgage was the monthly bill that caused them the greatest financial pressure.
He said that with the war in Iran affecting mortgage rates, the reader was unlikely to find a deal that would significantly undercut their current 4.78 per cent rate. Any early repayment charge for leaving so early into a five-year fix would also likely be substantial, making a switch to a cheaper rate, in his words, "highly unlikely to be viable."
The Mortgage Charter offers six months' breathing space
Hollingworth pointed to the Mortgage Charter, a set of measures introduced by the previous Conservative government during a period when the rising cost of living coincided with a spike in interest rates. Many lenders signed up to its terms, which were designed to help worried borrowers reduce their monthly payments.
Under the Charter, lenders committed to offering existing borrowers a new product up to six months before their current deal ends. It also allows a customer to switch temporarily to an interest-only mortgage for up to six months, or to extend their mortgage term, without the lender needing to carry out a new affordability check. The borrower must be up to date with payments to qualify.
Normally, a change of that kind would require a lender to reassess a customer's circumstances using evidence of income, something Hollingworth said would be "a problem for someone who has just lost their job."
Interest-only could cut payments by over £1,100 a month
With an interest-only mortgage, the reader would pay only the interest each month rather than paying down the loan itself. Hollingworth estimated this could reduce the reader's payments by more than £1,100 a month, bringing the bill down to about £1,900.
Extending the mortgage term, which spreads repayments over more years, would also lower the monthly cost, though by less. Hollingworth said lenders can offer terms of up to 40 years, and if that were possible in the reader's case, it could cut the payment by about £800 a month, down to roughly £2,100.
Both options come with a long-term cost
Hollingworth warned that both routes would increase the overall cost of the mortgage and stressed it would be important to switch back once the reader found a new job.
An interest-only period, even for just six months, means the loan balance does not shrink. When the mortgage reverts to a repayment basis, the higher remaining balance has to be repaid over a shorter timeframe, pushing up both monthly payments and the total interest charged.
Extending the term has a similar effect, since the mortgage is paid off more slowly and accrues more interest overall. Borrowers can switch back to their original term within six months, Hollingworth said, but if a longer term became permanent it could add tens or even hundreds of thousands of pounds to the total interest bill.
Talking to the lender early is key
Hollingworth said another important Charter commitment is that borrowers who contact their lender about payment concerns will not see this affect their credit file. He added that the interest-only and term-extension options would not put payments on hold entirely, but that explaining the situation directly to the lender could deliver a more tailored option, potentially including a payment holiday.
He advised the reader to speak to their lender as early as possible, saying lenders should work with borrowers to develop a personalised plan of action that could give them breathing space through a difficult period, while explaining the implications of any option chosen. Hollingworth wished the reader good luck in finding their next opportunity.
