Rent-room to ease financial pain

The number of people facing repossession in the UK has risen by 20 per cent in the last year, according to recent reports, but if you’re struggling to meet mortgage costs, there are ways to help ease the financial pain.

Many of those expected to face repossession are homeowners that took out cheap fixed rate mortgages a couple of years ago, which are now due to come to an end. These people are likely to see their interest rates and monthly payments soar once their cheap fixed rate comes to an end.

To help cover the additional costs, one option is to consider renting out a spare room to bring in extra income. However, you will first of all need to know the financial implications of getting a lodger.

Most importantly, you need to work out how much tax you have to pay, if any, on the money you bring in. Under the Government’s Rent a Room scheme, you can earn up to £4,250 a year – around £350 a month – from rental income, before you have to pay tax.

To qualify for Rent a Room tax relief, the property must be your main home and the room must be furnished. Any rent you get above the £4,250 amount will be taxed at 20 per cent if you pay tax at the basic rate, or at 40 per cent if you are a higher rate taxpayer. You must tell your local tax office if the amount you are receiving is above this threshold.

If you don’t have a room to rent out and are finding monthly mortgage payments a struggle, then switching your mortgage from a repayment basis to interest-only temporarily may help you weather the storm. For example, the average two-year fixed rate a couple of years ago was around 4.5 per cent, but it is currently about 6 per cent. On a £100,000 25-year mortgage, that means monthly payments shoot up to £644 on a repayment basis, but just £500 on an interest-only basis, compared to £556 and £375 respectively on the old 4.5 per cent rate.

With an interest-only mortgage, as the name suggests, you only have to repay the interest each month on the amount you owe. You must then pay back the lump sum you have borrowed at the end of the mortgage term.

But while this might make mortgage costs appear more manageable initially, unless you are strict about saving to repay the capital when the mortgage finishes, it could prove a costly mistake.

If an interest-only mortgage is the only option, then try to choose a deal that allows you to make overpayments when you can afford to. That way, you can reduce the capital whenever possible.

Another option worth considering if you are really struggling to meet the cost of your mortgage is to see if you could be eligible for a break from your monthly payments. Currently around six in ten mortgage products come with a potential payment holiday written into the terms and conditions.

Payment holidays allow homeowners to stop their mortgage repayments for an agreed period. They are normally only allowed if you have been a customer for a set period of time and have regularly met your repayment schedule on your mortgage.

The key message is not to despair – increased mortgage costs are daunting, but it’s worth considering the various choices outlined above, and always let your lender know if you are struggling to see if they can help.

By Melanie Wright

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