Whatever course the property market takes in the next 12 months, remortgaging will certainly play a significant role in the mortgage market. UK Finance says 1.8 million homeowners will come to the end of fixed-rate deals in 2023, and it’s safe to assume that all those customers will have to refinance at far higher rates.
According to data from the Office for National Statistics, the monthly cost of a new mortgage rose by 61% in the year to December 2022 for the average semi-detached house in the UK.
The chancellor may have painted an optimistic picture for the future, during his recent Budget announcement, with inflation expected to halve during 2023 and the UK now predicted to avoid a technical recession, but the cost-of-living crisis remains a reality for homeowners.
With mortgage costs increasing so significantly for so many, and higher prices for goods and services hitting everyone’s pockets, what steps can mortgage customers take to make their monthly income stretch further during this difficult period?
One emerging trend seems to be the growing popularity amongst mortgage customers for interest only mortgages. One broker firm says that enquiries for interest only mortgages have jumped by around 20% in the last six months, whilst lenders have also reported an increase in applications on interest only terms. This is likely driven by a desire to decrease monthly outgoings and can sometimes have a positive impact on affordability assessments.
Of course, as well as demonstrating affordability, a customer applying for an interest only mortgage needs to have a sensible strategy for repaying the loan at the end of the term. This doesn’t necessarily mean paying into savings or an investment plan. They may have investment properties they can sell, for example. For slightly older customers, in particular, whose children are perhaps teenagers and planning to leave the family home in the next few years, downsizing to a smaller, cheaper property can also be considered as a sensible strategy for repaying the loan at the end of the term.
At Pepper Money, we allow interest only mortgages up to 60% LTV, as long as the mortgage is supported by an acceptable repayment strategy. This strategy can include the sale of their main residence, where the equity in the property is suitable to downsize in the local area.
One of the fantastic things about the mortgage market is that it is so varied, with different products and options to meet a range of customer circumstances and requirements. As with many of these options, interest only is not right for everyone, but in the right circumstances, it can provide a realistic way of lowering monthly outgoings as long as the customer has a clear plan to pay off the loan at the end of the term.
Interest only mortgages are already growing in popularity and it will be interesting to see what role they play in the next 12 months.
Ryan Brailsford
Director of Business
Development
at Pepper Money