Home loan repayments up by over 50% compared to 2021 - how to beat the mortgage squeeze
Finance giants have been cutting interest rates in recent weeks, however repayments remain sky high compared to less than three years ago.
Martin Lewis speaks on loans and mortgages
The cost of repayments on new home loans is typically 57 percent higher than in 2021 when banks and building societies were involved in a mortgage price war.
The finance giants have been cutting interest rates in recent weeks, however repayments remain sky high compared to less than three years ago.
New research from upfront information platform, Home Sale Pack, includes a model that shows the real life impact on home buyers of the change.
It found that in December 2021, the average UK house price was £266,170. Based on a typical 15 per cent deposit, which equated to £39,926, a buyer would need a mortgage of £226,245.
At the time, the average interest rate for a 2-year fixed-rate 85 percent loan to value (LTV) mortgage was 1.71 percent. This resulted in monthly repayments of £927 based on a 25-year loan.
Interest rates subsequently rocketed to a peak of 6.35 percent on a 2-year fix in July 2023. Factoring in a rise in the average house price to £282,982 and a mortgage loan of £240,535, the monthly repayments would have surged to £1,602. That represented a punishing rise of 73 percent.
Now looking at July 2024, the average mortgage rate has eased to 5.3 percent. However, this has been partially offset by the fact that the average house price has increased since July 2023 to currently stand at £285,201.
Based on the same home loan scenario, repayments work out at £1,460, which is 57.4 percent higher than the low in December 2021.
The company said: “While homeowners and prospective buyers will be pleased to see costs falling, the situation remains far from comfortable with mortgage costs still considerably inflated.”
Ruth Beeton, Co-Founder of Home Sale Pack, said: “The falling cost of mortgages is good news, but it’s not great news because today’s mortgages are still considerably more expensive than those of 2021.
“Sadly, this might be a new norm we’re stuck with for many years to come due to increased interest rates after years of historically low rates.
“However, there are a number of ways in which you can make a mortgage more affordable and more manageable. But please do act with caution and make decisions based on advice from financial experts when you can.”
Top mortgage tips:
Make overpayments
If you’re on a low-rate fixed deal that will soon expire, use this time to overpay your mortgage if you can afford to, so that when your fixed-rate term ends, you’ve got less debt to pay at what will likely be a higher interest rate.
Most lenders allow overpaying, but some may issue penalties for doing so. Be sure to check with your provider.
Check your current rate
The most costly mistake that many people make is staying on their standard variable rate (SVR) deal after their introductory rate period has expired. Check your rate, and if you’re on an SVR, consider remortgaging onto a new, more affordable deal.
Extend your mortgage period
The typical mortgage term is 25 years, but if you want to reduce your monthly repayments, you might want to consider extending your term to 30 or even 40 years. This will reduce monthly costs, but may result in you paying more interest over time.
Offset mortgage
An offset mortgage allows you to use your existing savings to reduce the amount of interest you’re charged for a mortgage. So, if you have a decent amount of money in a savings account that you don’t want to tie up in property, an offset mortgage could still make that money work in your favour by reducing the cost of your mortgage.
Consider an interest-only mortgage
You can reduce monthly repayments by opting for an interest-only mortgage which means you only have to pay the interest on your loan each month. This makes it more affordable, but also means you’re not paying off any of your debt. The idea is that you will eventually pay off the debt when you sell the property for more money than you originally paid for it. This option should be considered a last resort when struggling to keep up with monthly mortgage repayments.
