How Could Coronavirus Impact Your UK Mortgage?
This has been a year like no other, and with wide-sweeping lockdowns, sector closures, and market pauses, financial concerns have been top of the agenda for many British homeowners.
The Revolution team has been speaking to clients and new homeowners over the last few months who have one primary worry - what will happen to their mortgage as a result of the pandemic?
As we move onto the tiered lockdown systems, and a New Year approaches, let's think about what challenges you might face, and what we can do to resolve them.
If you need any personalised advice about dealing with repercussions of the pandemic - for investments, rental properties or residential homes - give us a call on 0330 304 3040.
What Impact Do Changing Interest Rates Have on Home Loans?
The UK interest base rate dropped right down from 0.75% to 0.1% several months ago. While there was much talk of introducing a zero percent base rate, that hasn't yet happened - although banks were told to prepare for the eventuality, so there remains the potential to have a 0% base rate.
Firstly, low-interest rates can be positive as well as negative.
Secondly, it isn't the first time (although not perhaps quite as low); rates dropped to 0.25% in August 2016. Having such a low base rate is highly unusual, but it's probably not going to make a drastically negative change to many financial products.
How Mortgages React to the UK Base Rate
A lot depends on what sort of mortgage you have, and a lot of people opt for a fixed-rate mortgage simply because there is no uncertainty about what you're going to be paying each month.
Many UK lenders also offer some decent incentives to choose a fixed-rate term for, say two to five years, because it has the benefit of securing lending for that period, with only a little risk exposure if rates drop or hike significantly.
If you have a fixed-rate mortgage, nothing changes - you keep paying that same fixed rate until your term ends.
Alternatively, you might be on a tracker mortgage, or have finished a fixed-term period and switched over to your lender's SVR - standard variable rate.
This scenario is slightly different since the interest you pay is calculated each month, based on a number of percentage points above the Bank of England base rate. The great news for you is that you're likely to have seen your monthly direct debit drop, as the interest charges decrease.
Many homeowners on an SVR rate haven't remortgaged to a more competitive fixed-rate, because they have affordability or eligibility issues, are in arrears elsewhere, or don’t meet typical lender criteria to qualify.
Of course, whenever you have winners, you also have losers - and if you've been enjoying interest income on savings, that's going to drop too. However, it's probably not going to be earth-shattering, since rates have been low for a long time now.
Government Assistance for Homeowners During the Pandemic
While interest rates might not be changing your mortgage payments if you're on a fixed-rate deal, your income might be a different matter entirely.
As millions of employers have relied on the furlough schemes, reduced hours, closed altogether or cut back their operations, so too many millions of UK homeowners found themselves with a sudden drop in income.
There are a few options available to you:
- Contact your lender, and ask if they can offer a three-month payment holiday. Many lenders have been doing this (in all financial lending, not just in mortgages) - but it's crucial to make sure that isn't going to impact your credit rating as missed payments, so you need permission rather than just stopping payments.
The Financial Conduct Authority (FCA) confirms that borrowers can ask for up to six months holiday - but that lenders can only allow three months at a time.
Remember that you still accrue interest during the holiday unless you have a generous lender who is willing to waive this. So you'll take an extra three months to repay the mortgage, or potentially need to pay a higher value when payments resume.
It's also well worth doing your sums to work out if this is the right option.
For example, if you do end up with missed payments on your credit file, you're going to find it hard to refinance for the next year or two, and if you've got a fixed-rate ending in that time might be stuck into the SVR for quite some time.
That shouldn't happen - but must be clarified with your lender before you go ahead.
With decreases in interest rates, there are also potential deals out there to be had. If you're thinking about refinancing or are coming to the end of a contract, you might find that you can save a considerable amount of money:
- Refinancing debts and mortgage borrowing into one product, while interest rates are so low, might reduce your outgoings significantly. However, you should always seek independent advice as consolidating debts through a mortgage does mean you'll be paying it back for longer.
- Remortgaging is an option, either to raise capital or to find a cheaper rate. You can do this to raise funds anywhere up to around £10,000 without making a drastic impact on your monthly payments, and to cover living expenses for the interim period.
- Switching your mortgage to interest-only could be a good option for the next few months. That will significantly reduce your monthly payments. You can achieve the same effect by extending your mortgage term.
Changes to Lending Criteria During Lockdowns
This year we've also seen several changes actioned by lenders, in response to the pandemic lending climate:
- Many bad debt mortgages are no longer available.
- Eligibility criteria are tighter, such as many lenders no longer considering variable income sources in affordability calculations.
- Less 'non-standard' mortgage approvals for unusual properties, or self-employed people, for example.
While 2020 has been a challenging year for many, Revolution Brokers is always on hand to help if you need to release equity, find a competitive remortgage solution, or check out the best rates on the market.
In the meantime, we'd recommend not taking a payment holiday if you don't need to, seeking support from an independent, whole-of-market broker for any remortgaging applications, and to keep your nerve in a market that seems to be changing daily.