Expert advice: What should I do if I can't afford my mortgage - what are my options?

When they eventually come back, there’s every chance they’ll be significantly more expensive. This is going to have a profound impact on buyers and people who need to remortgage, so it’s worth knowing where you stand.

Problems started with the Mini-Budget last Friday, which worried traders enough for them to sell off the pound at the start of the week.

This makes everything we import far more expensive, so it raised expectations that the Bank of England would have to hike interest rates to keep a lid on inflation.

When people expect interest rates to rise, it pushes the price of government bonds down. And when investors start to worry about the country’s economic position, it pushes them down even further. I’ll go into more detail later if you want to know how this actually works, but essentially when bond prices go down, the yield goes up, and when that happens it makes mortgages more expensive.

Bond yields rocketed this week, and nobody knew where they were going next. It made it impossible for banks to price mortgages, so they stopped offering them until things settled down. Once the market is more functional, they’ll be back. The trouble is that they’ll be back at a much higher rate.

The good news for anyone who has already secured a mortgage – or an agreement in principle – is that this will have been offered to you at a rate that had already been secured, so movements now shouldn’t mean they withdraw your deal.

The mortgages that are being withdrawn are the ones on the shelves right now for new borrowers. There are no absolute guarantees, but you shouldn’t assume your mortgage is hugely vulnerable right now.

Buyers

It will, however, affect anyone buying a property. If you’re house-hunting at the moment, and haven’t agreed your mortgage yet, you run the risk that the mortgage company will decide you can’t afford to borrow as much as you want. When they do their affordability calculations, they’ll be factoring in higher house prices, higher interest rates, and the fact that all your other expenses have risen too, so it’s a much higher bar to clear.

If you’re lucky, the stamp duty cut will help close the gap, because it means you need to borrow less. Otherwise, a fortunate few may be able to boost their deposit by asking family members for help. If you’re not lucky in either department, you need to work out what you can afford to buy with your new budget, and whether you’re prepared to live there. It’s going to involve compromises, and you have to be certain you can live with them, because when the future of the house prices is as uncertain as it is right now, you don’t want to need to move again a year or two down the line.

Remortgaging

For anyone coming to the end of a fixed rate mortgage, if you have six months or less to run on your deal it’s worth shopping around for a new rate now, because you can lock in a deal up to six months in advance and protect yourself from rises coming further down the track.

If you have longer to run on the deal, you may be wondering whether it’s worth getting out early, so you don’t have to remortgage at an even worse time. The answer will depend on the early repayment fees you’ll pay, the fixed rate you’re on now, what you’ll remortgage for, and what you would remortgage for if you waited. It’s a complicated calculation – and one of the variables is totally unknowable.

However, you may want to do the maths – or ask a mortgage broker to work through it with you – to see whether on balance you think it’s worth it.

Even for people remortgaging now, there’s a risk that rate rises have pushed your current mortgage out of reach. Someone who fixed for two per cent two years ago could be looking at a remortgage rate at five per cent. If they had a £200,000 mortgage over 25 years that’s a rise in monthly payments of around £320. It’s a huge sum to produce from nowhere.

Don’t panic though, because there are still a few things you can do. Some people will be able to budget their way out of this. If you haven’t needed to cut costs yet, you can start with the easier things: like giving up non-essentials and shopping around for everything else. If you’ve already done this, there may be larger lifestyle changes that can help. If you’ve already cut your spending to the bone, you may be able to cut your mortgage payments.

When you’re looking for a remortgage deal, the more work you put in, the better the deal you can expect. Start with your credit record, and see whether there are any steps you can take to improve how you look to a lender - like paying down credit card debts. Then you’ll need to compare the market to find the cheapest possible deal. This is a relatively long-winded process, even using a comparison site, but the legwork may well pay off. If you don’t have the time for this, or it’s just too overwhelming, consider talking to a mortgage broker. In a tough mortgage market, they’ll know who is still lending, and who is likely to want to take on a mortgage like yours.

If the cheapest available deal is still too expensive, one option is to consider the mortgage itself. Depending on your age, you may be able to remortgage over a longer term.

You’ll end up paying more in interest because you’re spreading the payments further, but it will make the monthly costs more affordable. If you take this approach, you also need to consider the impact it will have on your future finances. If you’re paying a mortgage later in life, it may push your retirement plans back a few years, or it may mean compromises about your income in retirement.

If you’ve exhausted every possible avenue, and you still can’t afford your new mortgage, you may need to downsize. It’s a truly horrible decision, and one that nobody should ever rush into, but if you have no other options, the sooner you make the decision, the better.

It’s also worth talking to your mortgage lender and explaining your position. If you’re struggling, they have a duty to help find a repayment schedule you can manage while you go through the process of selling and buying elsewhere.

As someone who was forced to downsize when single parenthood and the global financial crisis joined forces, I can promise that while it feels really miserable at the time, if you make sensible decisions about where you can afford to live, it can transform your financial position. Sometimes there’s nothing to be gained from clinging onto a home you can’t afford, when you can be happier and less anxious somewhere that suits you better.

Why the bond market matters for mortgages

If you want to know how the bond market affects the mortgage market, there are a couple of things to get your head around.

Government bonds are essentially IOUs from the government, where you lend them money and in return, they promise to pay you a fixed rate of interest for a set period of time - and then pay the loan back.

Because bonds pay a fixed income, the more rates rise elsewhere, the less attractive that fixed income is, so bond investors sell up and go elsewhere. When investors get the jitters about the future of a country, they’ll also sell up, which pushes prices down even further. This is what happened this week, and why the Bank of England had to start buying bonds in an effort to stave off a crash.

When bond prices fall, the yields on them automatically rise. The yield is just a way of expressing the fixed rate of income as a percentage of whatever you paid for the bond. So if a bond costs £200 and pays an income of £4 – that’s a two per cent yield. If the same bond falls to £100, it still pays £4, but that’s a four per cent yield.

Yields come into play when pricing fixed rate mortgages. In order to offer a fixed rate, the lender has to swap their variable rate for a fixed rate from another institution – on what is known as the swaps market. The higher that bond yields are, and the more they’re expected to rise, the higher the fixed rate being offered will be – to make it worth the institution taking on the extra risk. This pushes fixed rate deals up.

At the start of this week, massive moves in bonds and yields made it impossible for everyone in the swaps market to price things sensibly, so banks stopped swapping and withdrew mortgages from sale.

Sarah Coles is a Senior Personal Finance Analyst for Hargreaves Lansdown and Podcast Host for Switch Your Money On