Mortgage holders raid savings, extend terms to meet higher payments

With mortgage rates still high, borrowers are doing what they can to be able to afford their monthly repayments.

This includes dipping into their savings, extending their mortgage term, switching to interest-only, and even moving home.

Higher payments after remortgaging

Although mortgage costs have started to come down, anyone remortgaging after their fixed rate has expired will likely end up paying significantly more.

The average two-year fixed rate currently sits at just under 6.5%, while five-year fixes are just under 6% on average.

These rates are far higher than homeowners became accustomed to over the past decade.

Raid on savings

KPMG's latest Consumer Pulse survey of over 3,000 consumers reveals that, to keep repayments at manageable levels:

• 18% of mortgage holders have used savings to reduce their outstanding mortgage balance;
• 16% have switched to an interest-only mortgage;
• 12% have lengthened their mortgage term; and
• 8% have downsized to a cheaper home.

Another 11% have reduced their pension contribution to cope with higher mortgage costs.

Up to a further quarter of people surveyed are considering taking such measures, likely only waiting for when their fixed-term deal ends, said Linda Ellett, UK head of Consumer Markets, Retail and Leisure at KPMG.

'Affordability under fire'

Higher living costs and rising interest rates have made life harder for new buyers and existing homeowners alike, said David Hollingworth from mortgage broker London & Country Mortgages, quoted by property website Zoopla.

"The rapid increase in mortgage rates from the historic lows of only a couple of years ago means that borrowers are facing much higher mortgage costs," Hollingworth said. "Affordability is therefore under fire."

Longer term mortgages

Extending the term of your mortgage will lower your monthly repayments but increase the amount of interest you pay overall.

For first-time buyers, this can make it easier to pass mortgage providers' affordability tests, while for those already on the property ladder it can make monthly payments more affordable.

An analysis by financial data provider Moneyfacts shows that 68% of the residential mortgage market in the UK now offers a maximum term of 40 years. This is an increase from 57% of the market last year.

One in four new mortgages for homeowners under 30 now have a repayment term of 35 years or more, up from one in 10 just three years ago, according to research by Experian.

Average rates coming down

For those holding out for lower rates -- either to buy a home for the first time or to remortgage -- the good news is that mortgage costs are coming down.

A freeze in the Bank of England base rate after almost two years of consecutive monthly interest rate hikes has given lenders confidence to cut mortgage rates. Many analysts expect the base rate to remain unchanged again at the next policy meeting in early November.

Several providers are now offering five-year deals below the 5% mark and average rates are continuing to fall.