The economy and the cost of living crisis haven’t been far from headlines over the last few months. With inflation still high and mortgage markets still reeling from the mini-Budget, it would be no surprise if you’re looking for more ways to cut down on your spending this year.
Chancellor Jeremy Hunt recently suggested that more flexible mortgages could alleviate some of the strain these challenging circumstances are having on borrowers. The Financial Conduct Authority (FCA) then mirrored this sentiment, as they urged lenders to provide more support.
These flexible mortgages have been referred to as “stretchy mortgages”, but what exactly are they? And are they the future of borrowing in an unfavourable economic climate? Keep reading to find out everything you need to know.
Stretchy mortgages allow you to temporarily extend your term and stretch out repayments
As mentioned, the current chancellor, Jeremy Hunt, has urged banks and lenders to be as flexible as possible with borrowers to help with some of the strain that the current economic climate has presented.
The FCA then published guidance for lenders stating that they should be more supportive of customers struggling with the cost of living crisis by accepting less than the agreed-upon monthly repayment.
On top of this, lenders were told to develop more innovative solutions to support borrowers – for example, to vary a contract to spread out the repayments.
This flexible approach to mortgage lending has been called a “stretchy mortgage”. With these, you may be able to extend your mortgage term to temporarily lower your monthly repayments.
Tough economic conditions could result in more missed mortgage payments
The current economic climate has put pressure on borrowers, with this likely to continue over the coming year. The Bank of England (BoE) has already set the base rate at 3.5% to combat inflation, and some experts predict this could rise even further in 2023.
Higher mortgage rates could result in more missed mortgage repayments, which could then lead to an increased number of repossessions.
In fact, UK Finance expects pressure to rise in mortgage arrears from early 2023 and well into 2024. The source predicts that the number of households in arrears next year could reach as high as 98,500 in 2023, which is around 1% of all outstanding mortgages.
This is partly why the FCA has urged lenders to exhibit more leniency and support towards borrowers who may struggle financially over the next few years.
When a borrower temporarily extends their mortgage repayment term, they essentially spread their payments over a longer period, reducing monthly costs.
So, in theory, stretchy mortgages could help support you if you’re struggling with your mortgage repayments amid the cost of living crisis.
While stretchy mortgages could lower your monthly repayments, you could end up paying more in total
So, could so-called stretchy mortgages present a real solution to the cost of living crisis? While they may reduce your repayments in the short term, they could increase the amount you pay overall.
Here’s an example. This is Money reports that a £200,000 mortgage on an initial two-year fixed-rate deal, being repaid over a 25-year term on a 5.84% interest rate, would see you paying £1,269 monthly.
Meanwhile, the same mortgage extended to a 35-year term would see your monthly repayments drop by £150 to £1,119. This means you’d save £1,800 a year by extending your mortgage period to 35 years.
As you can see, you will pay less each month when you temporarily extend your mortgage repayment period using a stretchy mortgage. So, this could help alleviate some of the financial strain caused by high rates.
A stretchy mortgage might increase your total interest costs
While temporarily extending your mortgage term might bring your repayments down, you could end up paying back more overall.
For example, data from This is Money shows that someone with a £200,000 mortgage paying 5% interest over 25 years would face monthly payments of £1,169 and would pay a total of £350,754 over the 25-year term.
Meanwhile, the same mortgage over a 35-year period would see borrowers paying £1,009 a month. While this is more than £150 cheaper each month, this would result in a total of £423,037 to be repaid over the 35-year mortgage term.
Borrowing over an additional 10 years would cost an extra £73,183 in total.
So, stretchy mortgages may be a promising idea to temporarily alleviate some financial strain if you’re struggling with repayments. Still, it’s worth considering that you could end up paying more overall.
Get in touch
If you are concerned about your mortgage rate rising in 2023, and you’d like advice on how to access the best mortgage deal for you, we can help.
Please email enquire@london-money.co.uk or call (0207) 808 4120.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.