The average mortgage holder with £165,000 outstanding balance going onto a fixed mortgage deal at 6%, from 2%, faces an additional monthly cost burden of £347, according to data from interactive investor.
Uncertainty over how high interest rates will go has resulted in an increase in mortgage rates, with the average rate for a 2-year fixed-rate mortgage at 6.3%, while the average 5-year deal now stands at 5.91%.
There are more than 700,000 households with a fixed rate mortgage deal set to expire in the second half of this year – the majority of which were fixed at 2% or below.
A number of banks and building societies pledged to offer more flexibility to struggling mortgage holders as rates soar as part of a Mortgage Charter launched by the Treasury.
This could mean extending their term to reduce their payments or offering a switch to interest only payments.
According to interactive investor, someone seeking to remortgage their home with an outstanding balance of £165,000 could reduce their monthly repayments by £274 to £908 (from £1,182), or £3,291 a year, by extending their mortgage term from 20 years to 40 years.
However, doing so would inflate the total cost of the loan from £283,707 to £435,769, assuming 6% interest.
Even extending the loan by five years from 20 to 25 would reduce monthly repayments by £119 (£1,428 a year), adding £35,222 to the total cost of the loan, amounting to £318,929.
The monthly savings were greater at a higher level of borrowing. A homeowner with a £300,000 mortgage balance seeking to refinance could reduce their monthly repayments by £499 to £1,651 (£5,984 yearly) when extending their mortgage term by 20 years.
However, the total cost of the loan would jump from £515,830 to £792,308 – an extra £276,478 in interest costs.
Increasing the mortgage term by five years could shave £216 off monthly repayments to £1,933 but would mean an extra £64,041 in interest costs (to £279,871).
Myron Jobson, senior personal finance analyst at interactive investor, said: “The mortgage affordability crisis has cast a dark shadow over those seeking to remortgage their homes, leaving a trail of challenges in its wake.
“This financial strain weighs heavily on homeowners already struggling to battle the inflationary beast in other areas of expenditure like food bills.”
He added: “Our research shows that the popular options offering short-term relief on the monthly mortgage repayment burden come at a considerable cost over the long-term.
“Those able to extend their mortgage term from 20 to 40 years could shave almost £500 off their monthly repayment bill based on a £300,000 mortgage balance, but face having to fork out £276,478 extra in interest costs.”
Jobson concluded: “It is a difficult time for the 700,000 households with fixed rate mortgage deals set to expire in the second half of this year – the majority of which was fixed at 2% or less.
“But it is important that those seeking to reduce their mortgage repayment burden fully understand the short- and long-term implications of the different options.
“If you haven’t already done so, it is a good idea to see if there is any more wriggle room in your budget to foot heightened mortgage costs. It is worth consulting a mortgage adviser to explore your options.”
