A mortgage real life story

Analysts say that the Bank of England is caught between a rock and a hard place. They have a choice between allowing inflation to run riot or killing borrowers with ever higher interest rates. We see the numbers, but how does it real people in real life?

Carl (43) and Jenna (36) bought their twobedroom flat just as the pandemic eased in June 2021. They’d found a gorgeous two-bedroom Victorian flat in Sydenham for £675,000. It was the perfect little family home for them and their daughter of 6. They had £175,000 to put down after paying stamp duty, so only needed a mortgage of £500,000.

They had options when choosing their mortgage. As first-time buyers, it was a tossup between a two or five-year fixed rate. They opted for a two-year fixed rate not wanting to be tied into a deal for too long in case they had another child. It was going to be tight but just about affordable. The term was 25 years, the fixed rate was 1.46% and their monthly repayments were going to be £1,990 per month.

All things considered, they would be left with a cash surplus of about £1,000 every month which would probably get gobbled up by unforeseen events like socialising and eating out.

Two years went by extremely quickly. The cost-of-living crisis had bitten, meaning their cash surplus was almost non-existent. In summer 2023, they received a letter from their lender informing them that their fixed rate deal had come to an end. The mortgage now stood at £497,000 and they had 23 years left on it. If they did nothing, their mortgage would switch over to the standard variable rate, of 8.49%. This meant that their monthly repayments would jump from £1,990 to £4,057!

Carl called their mortgage broker in a panic. What could be done? Surely, they couldn’t be expected to pay £4,057 for their mortgage! Especially in this new climate where everything but their salaries had gone up! Their broker called back with bad and good news.

The bad news was that because things were so tight for them, they were effectively mortgage prisoners. This meant that the only lender who would consider them was the one they were with right now. Other lenders would decline their application on the grounds of affordability. The good news was that their current lender would consider them for a new 2-year fixed deal at 6.14%, £3,368 per month, or a 5-year fixed deal at 5.49%, £3,180 per month. Good news? It was still unaffordable!

The mortgage broker decided to contact their lender as a last resort. At over £3,000 per month, their mortgage was clearly unmanageable. Trying to sell their flat in what was now a difficult market was not a realistic option either. What could be done?

Surprisingly, their lender was sympathetic and wanted to do all they could to help. They suggested extending the mortgage term to 32 years, which could be done because of Jenna’s age. They also suggested temporarily converting half of the mortgage to interest only. Doing these two things would reduce their monthly repayments to £2,250 per month at the 5-year fixed rate.

Carl and Jenna are hoping interest rates will start falling soon, as do many people who have mortgages. If they do fall, they should be able to bring their mortgage account back to where it should be, albeit after losing a bit of ground. For now, they can keep their home and just about afford the odd night out.