Speaking to Mortgage Solutions about how borrowers were preparing, lifestyle changes and restructuring the loan were cited as some of the ways homeowners were coping.
This comes after data from the Office for National Statistics (ONS) showed that homeowners with a mortgage faced the highest inflation in household costs compared to any other tenure because of rising interest rates.
Scott Taylor-Barr, principal adviser at Barnsdale Financial Management, said: “On the whole, everyone I speak to knows that rates have gone up and they will be paying more when they refinance.”
He said some people had a rough idea of what the increases could be, while others overestimated and expected a bigger jump in monthly mortgage payments. For the most part, borrowers are correct in their assumptions, “so there’s rarely any nasty surprises”, he added.
Richard Campo, founder of Rose Capital Partners, said his firm was seeing a “huge variance” in the level of preparedness among clients.
Campo added: “At one end of the spectrum, we are seeing clients pay off loans entirely, or making very large overpayments.
“At the other end, some are choosing to or having to sell property, particularly in the buy-to-let (BTL) space where higher interest rates, high leverage and the tax treatment on higher-rate taxpayers means the numbers just don’t add up anymore.”
Rob Peters, principal at Simple Fast Mortgage, said there were two camps of people, firstly made up of those who knew what was going on, were following the press and were aware that payments were rising, so were taking measures to counter that, such as cutting costs and cancelling subscriptions.
“The ones who are really prepped are probably looking online, keeping an eye on what’s happening with rates and estimating what their payments might be. A lot of the press is catastrophising things and people are quite worried by the time they get to that stage,” he added.
On the other hand, Peters said there were people who “just don’t know”. He said they did not know how or why their payments could rise and could “get quite shocked by finding out”.
Peters said his more organised clients tended to be more prepared and have a better handle on their finances.
He said most employed people also expected a pay rise each time, so if incomes were going up, “that can counter things” by the time they come to refinance.
Peters said people who fixed five years ago had the biggest challenge, as they would have been paying a rate of around one per cent.
“They’re the ones who are going to see a bigger increase,” he added.
Peters suggested debts could be consolidated into a mortgage, but there was a downside to this as the interest would be charged over the loan term.
“But there’s only so much you can control, there’s no point putting yourself through hell today to get to a good place in 25 years,” he said.
Peters said it was also easier for people to extend their mortgage terms if they needed to as more lenders were offering this feature. He said lenders were allowing borrowers to extend the mortgage until the age of 70 or 80, in some cases older, “particularly if their occupation lends itself to one where they could continue working or they’ve got some sort of other repayment plan in place”.
Dee Ganesharajah, partner at P10 Financial Group, said the widespread media coverage meant clients were not shocked about rate increases.
She added: “Although, for the majority, the mortgage may still be deemed as affordable by the lender it has had a knock-on effect on lifestyle and the amount of disposable income available, especially in the case where families have extended over the years. A few clients are seriously considering downsizing to be able to maintain their current standards of living.”
These views were also reflected by UK Finance, who in its latest Household Finance Review said the affordability tests conducted during the origination of a mortgage meant many borrowers were coping with higher payments after refinancing.
Tightening belts
Regarding the action being taken, Campo said there was little borrowers could do if they did not have other savings or higher incomes, but for most it was a matter of “getting on with the higher payment and cutting back in other areas”.
He said: “Perhaps not having three holidays per year, or not ‘Ubering’ three to four meals per week or maybe even the car goes back or downgraded. The reality is that, for most, they simply have to cut back on spending.”
Taylor-Barr said people were cutting back in preparation, such as cancelling gym memberships, entertainment subscriptions and reining in holiday budgets.
“Overall, these actions don’t cover the mortgage increase, but they help,” he added.
Being proactive
Ganesharajah said borrowers were considering their options earlier than usual.
“Where it is common practice for brokers to contact clients at least six months in advance, we are now seeing clients coming to us first, if not sooner. Historically, they would wait until the last minute to consider their options, but borrowers want to know what to expect, to forward plan and lock in their new deal as soon as possible to avoid potential disappointment and be in readiness six months prior,” she said.
Ganesharajah added: “This also results in us re-broking and re-submitting the same case numerous times before completion to ensure that they are on the best deal possible.”
She said the high-net-worth individual (HNWI) clients that P10 sees were looking to reduce their borrowing by making lump sum overpayments and increasingly thinking about tracker options.
“Not only for the possibility of a Bank of England (BoE) base rate reduction, but also so as and when lump sums are available such as bonuses, vested shares or tied up capital, they want the flexibility to overpay with no penalty, which has also resulted in an uptake of offset mortgages,” Ganesharajah added.
Other ways of managing
Campo said that, apart from making personal changes, borrowers were taking advantage of the options provided by lenders.
He said the most common option was to increase the mortgage term with a view to reduce it back down in two to five years when rates have “decreased and hopefully their salaries increased”.
Others were converting the loan to interest-only or part and part payments. Campo said this was less common, but as Rose Capital Partners’ clients tended to have large annual bonuses, “they were happy to keep the loan repayment and pay down as needed” when rates were lower.
“Now it can also make sense to put some or all of the loan interest-only, and you can use the bonus to reduce the loan that way,” Campo said.
He continued: “The general consensus view is that interest rates will come down from here, so this is likely to be the most expensive mortgage most clients will have, therefore changing the loan in the short term is no bad thing as we can revisit in a few years when rates are lower and hopefully their incomes higher.”
Taylor-Barr said most borrowers were able to absorb the higher payments due to increases in pay since the mortgage was taken out.
Similar to Campo, he said: “For those that do think they’ll struggle with the increased payments, we talk through options such as extending the repayment term, maybe even thinking about a delay to retirement to allow that.
“In more extreme scenarios, moving part of the debt to interest-only or even selling the property are discussed, but thankfully these are very rare.”
