Martin Lewis gives advice on overpaying on your mortgage
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The current economic turbulence in the UK and beyond is causing concern for homeowners who are seeing their monthly mortgage repayments get increasingly expensive. However, the latest mortgage market analysis by specialist property lending experts, Octane Capital, suggests that Jeremy Hunt’s proposed idea of stretchy mortgages could save them more than £170 per month.
According to Octane Capital, the current average UK house price sits at £294,559. With an average deposit of 25 percent (£73,640), this could mean buyers are taking out standard variable rate mortgages to the tune of £220,919.
With an average mortgage rate of 5.42 percent paid over 25 years, the average monthly mortgage repayment is now £1,346, or £998 for interest-only payments.
Amid wider cost of living increases, increasing mortgage costs could pose problems for many UK homeowners, with the risk of missed payments and repossessions increasing.
However, in an attempt to stave off the issue, Chancellor Jeremy Hunt encouraged banks to be flexible with mortgage borrowers during a meeting with bank chief executives and the Financial Conduct Authority (FCA), reports have said.
Following this, the FCA published a guidance draft for lenders last week to better support customers during times of high costs and help smooth or reduce monthly increases in mortgage payments.
The flexibility is referred to as ‘stretchy mortgages’, which pertinently, could allow people to temporarily increase their mortgage repayment period from 25 years to 35 years.
Experts at Octane Capital suggest that if this plan were to be implemented, it could result in the average mortgage repayment falling by £171 per month to £1,175.
The move could provide some much-needed relief to struggling homeowners. Particularly if Bank of England Base Rates reach as high as the predicted 4.8 percent by mid-2023, which history suggests could see the average mortgage rates rise to 6.95 percent.
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This, coupled with what Lloyds Bank predicts will be a -7.9 percent decrease in house prices in 2023, could see monthly mortgage repayments average at a hefty £1,432.
Jonathan Samuels, CEO of Octane Capital, said: “There are many homeowners across the UK who are feeling the strain of rising mortgage costs this Christmas.”
But, he continued: “While we wait patiently for economic improvement in 2023 it might be a wise move to try and protect against the risks of missed mortgage payments, and worse still, repossessions.
“The Chancellor’s stretchy mortgage suggestion has the potential to provide some temporary relief for struggling homeowners while affording more time for the Bank of England to get a handle on inflation, and rising interest rates, which are currently being pushed up by wider economic uncertainty and energy costs.”
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The FCA guidance is currently under review, with final comments from stakeholders welcomed until Wednesday, December 21, 2022.
Why are mortgage rates on the rise?
Liz Truss’s Government held a mini-budget which sent shockwaves through the market in September with interest rates tripling and housing groups reporting a drop-off in sales activities.
The uncertainty caused some of the country’s major lenders, including Barclays, Natwest, Halifax and Virgin Money to pull deals before restoring them back to the market with higher prices.
Tzana Webster, Director of Property Sales at Watermans, said: “This market uncertainty and the volatility of the pound led to increased interest rates, especially when compounded by other factors, such as increased borrowing from the pandemic, the supply chain crisis and Russia’s war in Ukraine.”
Will inflation increase house prices?
Ms Webster said: “This trend of higher home-loan costs and lower housing prices is likely to continue well into next year, despite the calming of financial markets since Rishi Sunak’s accession to Prime Minister.”
But, Ms Webster continued: “Naturally, a sharp rise in mortgage borrowing costs has a major impact on house price affordability. High prices which once seemed affordable will soon be so much less when the cost of borrowing increases.
“This contributes to a slowing in housing market growth and the value of some houses, which become overly inflated will be reduced.”
While analysts have been predicting the current financial turbulence to see house prices plummet by 20 percent, this view isn’t entirely shared by experts at Twindig.
Anthony Codling, CEO of property platform Twindig, said: “We do believe that house prices will fall in 2023, but not by as much as most commentators are suggesting.
“We believe that house prices may fall by 10 percent next year, which would take them back to levels last seen in March 2021, and around seven percent or £16,000 higher than they were at the start of the COVID-19 pandemic.
“This is not a house price crash. Deposits underpin house prices and drive housing transactions.”
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