Against this backdrop, many households must act now to weather the worst cost-of-living crisis in decades, experts say. For those struggling but just managing, debt experts told us how to prioritize bills, mortgage advisers how to lower monthly costs, energy experts how to pay off home heating bills and food writers how to make a weekly plan. But what about the households that aren’t sinking financially, but are actually sinking and just can’t pay their bills? Our experts also advised us on some of the options, including the right way to not pay. Are you on a variable or fixed rate mortgage? Photo: BrianAJackson/Getty Images/iStockphoto
How costs increase
For the 2.2 million people on some sort of variable rate mortgage, Thursday’s rate hike was very bad news and will mean many will have to pay hundreds of pounds extra a year. It was also a very difficult time for anyone looking to take out a new fixed rate mortgage. About a year ago, the average new two-year fixed rate was 2.25%, but in recent weeks typical new rates have topped 6%. On Thursday of this week, the new two-year retracement average was 6.46%. On a £250,000 mortgage (pay-off, 25-year term), an interest rate of 2.25% would mean a monthly cost of £1,090, while at a rate of 6.46% it would be £1,681. Over 6 million existing UK mortgages have been fixed, so for now these people are insulated from this latest rate hike.
What can you do now?
Ray Boulger at mortgage broker John Charcol says the simplest way to reduce your monthly mortgage bill is to extend the term, although this will increase the amount of interest you pay overall. You can ask your lender for a temporary interest-only period, which will significantly reduce your payment John Charcol’s Ray Boulger “It will depend on your age, with most lenders offering a maximum age of 75. If you’re, say, 50 and have 10 years left on your mortgage, extending it to 75 will make a big difference,” he says. Bank of Ireland UK’s mortgage calculator shows that a borrower with 12 years left on a £150,000 loan would have to pay £1,463 a month at 6% interest, but this plummets to £966 a month if the mortgage is extended to 25 years. Different lenders may have different rules. For example, the Nationwide Building Association says: “You can apply to extend or reduce the term of your mortgage at any time.” However, it warns that affordability will be checked and you can’t apply if you’re already late. The other main option is to switch from a repayment loan to an interest-only loan. “You can ask your lender for a temporary interest-only period, which will significantly lower your payments,” says Boulger, who advises borrowers to negotiate as long an interest-only period as the bank will grant. A £200,000 mortgage at 6% and with a 25-year term drops from £1,289 a month to £1,000 if the borrower switches from full repayment to interest only.
What to do if you can’t pay
If you get to the end of the month and let your direct debit bounce, then around two weeks later you’re likely to get a letter or a call from your mortgage lender. It is much wiser to contact your lender first. Write to them, telling them why you are struggling to pay and what you can afford each month. The rules say your lender must consider any reasonable request from you to change the time or way you pay your mortgage. “Lenders see repossession as a last resort, and courts are very reluctant to issue a repossession order if the borrower has made an effort to pay,” says Boulger. Ultimately, the best course of action for some people may be to consider selling their home. “If you can’t find another way to pay off your mortgage, you may want to consider selling your property. This would give you a lump sum which you could use to pay off your mortgage,” says Citizens Advice. But finding a buyer at the price you need could be difficult if some of the predictions about what could happen to house prices turn out to be correct. While some commentators have predicted that property values could fall by 20%, others disagree. Property website Zoopla said this week: “The most likely outcome for 2023 is… a modest fall in house prices of up to 5%. More people are struggling to pay the rent. Photo: Nathan Stirk/Getty Images
How costs increase
Housing charity Shelter England says almost 2.5 million tenants are either in arrears or are constantly struggling to pay their rent – a 45% increase since April 2022. Figures show average private rents in Britain have soared to record highs. Property website Rightmove reported a fortnight ago that the average advertised rent in Manchester, Birmingham and Greater London was 20%, 17% and 16% higher than a year ago. A big unknown going forward is how buy-to-let landlords will respond to the current conditions. Many have multiple interest-only mortgages and can expect steep increases in costs. “A lot of landlords are coming in to refinance and, in some cases, find they can’t do it with current interest rates and stress tests,” says Chris Sykes at brokerage Private Finance. Many will try to raise rents, but may well struggle to find tenants able to afford the increases. Others may leave the market, evicting their tenants to sell.
What can you do now?
Many tenants will find themselves in despair. Shelter England says: “Reusing your old tea bags, wearing another pair of glasses, taking a shorter shower or simply ‘working longer hours’… Some of these ideas are sensible, many are ridiculous and some are just plain offensive – by protecting people who are already doing what they are doing I can get by.” Citizens Advice says talk to your landlord straight away if you’re behind on your rent. Photo: Mark Waugh/The Guardian He recommends people email their MP asking for an increase in housing benefit and caps on rent rises. If things are difficult and you have a good relationship with your landlord, you may want to have a chat.
What to do if you can’t pay
Citizens Advice says if you fall behind on your rent in a private tenancy, talk to your landlord straight away. “Pay what you can and ask them for more time to pay. Don’t ignore the situation. Your landlord can begin eviction proceedings immediately.” If your landlord ignores you, keep a record of how much you tried to pay and when you tried to pay it. This can help you later if your landlord takes you to court. Shelter has a number of newsletters (different rules apply in different parts of the UK) at shelter.org.uk. Like others, he recommends checking to see if there are any benefits or payments you may be entitled to and are not claiming. 3
Household bills including energy
This winter heating bills will be the focus of many people’s financial worries. Photo: Linda Nylind/The Guardian
How costs increase
The current inflation rate of 10.1% is driven by the cost of food and fuel, but consumer goods have also risen sharply in price, while credit card rates and average personal loan rates for new applicants have risen.
What can you do now?
Any debt counselor will tell you to work out your budget first, and there are many free templates available online. Debt charity StepChange has a comprehensive budgeting tool that you can print and complete. National Debtline’s budgeting tool is here. Sara Williams, who has worked as a Citizens Advice consultant and runs a not-for-profit blog called Debt Camel, recommends that households open a separate bank account that will be used to pay all your direct debits and standing orders, covering rent, council tax, energy bills etc. At least you know the essentials are paid for.” Every marginal saving helps. There’s no point in leaving appliances on standby or overfilling a kettle Adam Scorer of National Energy Action For example, if you know your current fixed-rate mortgage deal is coming to an end, try to find out now what the additional costs might be. “Cancel things now. Cancel vacation plans. Make the hard decisions now,” says Williams. Obviously, this winter’s heating bills will be at the center of many people’s money concerns. Adam Scorer, the chief executive of the charity National Energy Action, says: “Every marginal saving helps. There’s no point in leaving appliances on standby or overfilling a kettle. If people can do it safely, then lowering the thermostat by one degree, or lowering the flow temperature in a combination boiler, can save even more.” However, he believes that these savings are indeed only marginal in the context of galloping accounts. “Many are well beyond these options. Those who simply won’t heat their homes. Who will lay more clothes and go to bed early. They may be foraging for wet pallets to burn. They may turn to pawn shops, scrap yards, high-cost credit or worse.” His charity is calling on the government to “do more for those at real risk this winter”. The Guardian has published many articles on controlling energy consumption. Meanwhile, the body of consumers Which? lists 17 ways to reduce household bills and living costs. As well as energy-related, she recommends changing your broadband provider, changing your mobile phone contract and shopping around for home and car insurance.
