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Despite this week's huge cut in base rates, these are still difficult times for many homeowners. If you are worried about falling behind with your mortgage payments, what are your options when it comes to reducing your monthly outlay?
First, look at your overall expenditure to see if there are areas where you can cut back. Some people - particularly those who have been sitting on their bank or building society's standard variable rate for a while - will be able to reduce their monthly bill by switching to a more competitive mortgage deal. It helps if you have quite a bit of equity in your property.
Interest-only: A more serious option if you have a repayment mortgage is to switch the loan to interest-only. With these deals you pay only the interest on the loan. You don't pay off any of the capital debt, and it is up to you to set up a repayment vehicle - in the 1980s it was an endowment policy - to repay the loan at the end of the term.
By switching to interest-only you may well see your payments go down by around a third, knocking more than £230 off the monthly payments on a typical £150,000 mortgage, according to Moneysupermarket.com.
Falling interest rates may make this even more appealing. But watch out: some lenders are now clamping down on these deals. Last week, Cheltenham & Gloucester said its existing customers would no longer automatically be allowed to switch from repayment to interest-only if their mortgage is worth more than 75% of the value of their home. However, a C&G spokeswoman says that if a customer is in financial difficulty a switch to interest-only is something that would be considered, along with other options such as taking a payment holiday or converting to another product.
Earlier this year, Abbey changed its rules so existing customers switching to interest-only can only borrow a maximum of 50% of their property's value in this way if they cannot provide evidence of a repayment vehicle; the rest must be on a repayment basis.
Switching to interest-only may be tempting, but it should be a treated as a last resort for anyone struggling to make ends meet, as it will dramatically increase the overall cost of the mortgage, says Louise Cuming at Moneysupermarket.com (see example, above). If you do make the move, go back to repayment as soon as you can.
Increase the term: Another option is to increase the term of the loan in order to reduce the monthly payments. Halifax and HSBC are among the lenders that will go up to 40 years. On the face of it, the maths of mortgage stretching looks pretty good. A £150,000 mortgage spread over 25 years at 5.49% costs £920 a month. Extend the term to 40 years and that drops to £772. But there is a catch. While your monthly outlay will be lower, by the time the deal comes to an end you will have paid far more interest - £94,000 in this example.
Payment holiday: If you are just looking for breathing space, a payment holiday may be the answer. The Halifax will let customers take up to six one-month payment holidays over the life of the mortgage, while C&G says in some circumstances borrowers can pay less than the full amount due, or even suspend their payments for a short time. After the holiday, monthly repayments are recalculated upwards.
If you tell your bank or building society you have lost your job and ask for a payment holiday, the approach will vary depending on the lender and the individual, says Melanie Bien at mortgage broker Savills Private Finance. Some will be willing to suspend payments if, say, you have a definite job to go to in two or three months' time.
"Someone who has not had problems with payments before and is unlikely to be out of work for long will fare much better than someone who is constantly missing payments. It underlines that it is important to speak to your lender before you miss a payment," Bien says.
What you can save - at a price
For someone with a typical £150,000 mortgage, switching from a repayment basis to interest-only can knock £236 a month off the monthly payment - taking it from £921 down to £686 (based on a 25-year home loan with a rate of 5.49%). But such a move will dramatically increase the overall cost of the mortgage.
For example, if you decided to switch to interest-only for the first seven years of the deal, and then move to a repayment basis (where you pay back some of the capital and the interest) for the remaining 18 years, you would fork out a total of £294,887 over the 25-year term. This total is made up of £57,645 of interest in the first seven years, plus £237,242 of capital and interest in the next 18.
Keeping the deal on a repayment basis for the full 25 years would cost you a total of £276,869. In other words, those seven years of lower monthly payments have cost you £18,018, according to figures supplied by moneysupermarket.com.
You will also get quite a shock when you move to repayment after seven years, with your monthly mortgage bill leaping from £686 to £1,094.
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