Keeping up with the mortgage

The clutch of interest rate rises over the 13 months to August 2007 means that thousands of mortgage borrowers are living under a cloud of going into arrears. Higher costs have added around £135 to the monthly cost of a typical £180,000 mortgage, leaving many householders seriously out of pocket.

According to the Council of Mortgage Lenders, in the first half of the year, 14,000 owners with long-term arrears had their homes repossessed by their lenders - the highest number since 1999 and a near 30% rise in just 12 months. Borrowers who find themselves getting into difficulty are urged not to bury their head in the sand and to speak to their lender to see what options are available to them.

"Overall, the vast majority of mortgage borrowers will continue to cope, even in a market where affordability is stretched," says Michael Coogan, CML director general:.

"But anyone who thinks they may face difficulties should talk to their lender early to explore their options - lenders see possession as a last resort, but allowing arrears to mount up makes repayment difficulties more difficult to deal with, and is not a sustainable strategy for everyone."

So what are the best ways of keeping up with repayments?

Shop around for a better mortgage deal

Experts urge those looking for good mortgage deals to do their homework and move quickly. If you delay as your existing fixed or discounted rate deal reaches the end of its term, you risk being moved on to your lender's standard variable rate.

You should ensure another deal is in place so that you can make a phone call and trigger it on the day your fixed rate expires. You should plan ahead by diverting funds into savings so you can pay off a chunk of mortgage and get used to paying higher costs.

If you are struggling with your finances you should always make your mortgage your first priority and get on to a low rate fast. Getting a bad payment record limits your options. Best-buy deals tend to be reserved for those with faultless repayment histories. Borrowers who have missed even one monthly payment may be rejected and forced on to higher-rate alternatives.

Are you looking to remortgage? Maybe to extend your mortgage or just to get a more competitive interest rate?

Going interest only

Going interest only is popular among borrowers who need to reduce the pressure on their finances. Most lenders will change payment schedules on to interest only terms at any time and there are rarely any fees charged for the new calculations.

Using an interest-only mortgage keeps your monthly payments down until you can afford the higher monthly payments of a repayment mortgage. You could also take the interest only route if you dont want to put yourself under financial pressure each month.

What's more, if you continue to save, at the end of the year, if you haven't used the money put aside for, say the boiler blowing up, you can make a lump sum payment. Most mortgage lenders, including the majors such as Halifax, Abbey and Woolwich allow you to repay up to 10% of the capital every year.

But there are long-term repercussions. An interest only mortgage may seem like a cheaper bet - it isn't. If you never pay off the loan, it will cost you more over the life of the mortgage because you continue to pay interest on the whole amount throughout the term.

A recent report by the Financial Services Authority found that while consumers taking out interest-only mortgages have a reasonable understanding of the risks involved, around 10% have either no idea or at best only a rough idea of how they plan to repay the loan.

"There is nothing wrong with interest only mortgages. However, consumers must be very clear about how they are going to repay the loans," says: Clive Briault, Managing Director of Retail Markets. "Consumers' repayment plans need to be realistic and robust. They should not assume that house prices would continue to rise at the rate seen in recent years."

Sure about your mortgage choices? If you're not and you need someone to talk to, why not call us for independent, unbiased mortgage advice.

03 October 2007 © Moneyextra.com

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