We’re in the midst of a cost of living crisis in the UK. With inflation on the rise, 30% of homeowners and renters are struggling so much that they cannot afford housing costs and 3% are falling behind on their debt repayments. With the cost of food and fuel peaking, household budgets have not been this under pressure for 40 years.
If you can’t pay your mortgage, it is important to speak to someone early. As mortgage experts and advisors, the door is always open at Mortgage Light. We offer help and guidance if you are struggling. With this in mind, we’re here to offer some information on what you should do if you can’t pay your mortgage and what the potential implications of this could be.
In this guide on what happens if you can’t pay your mortgage, we’re going to cover:
Missed repayments and arrears
Your mortgage is likely to be one of your biggest monthly costs. If you are currently on a variable-rate mortgage, your repayments may have increased with the recent rise in the Bank of England Base Rate. Perhaps they have increased to the point where you are struggling to make the repayments alongside your other financial commitments and bills.
If you miss a repayment on your mortgage, your lender will initially report this to a credit reference agency as a ‘missed payment’. This information is shared amongst the various different credit agencies. It will then remain on your records for at least six years. Unfortunately, this will negatively affect your credit score and therefore may not act favourably to obtain further finance. The longer you go without catching up on your mortgage repayments, the greater the impact on your credit score.
Missed repayments will also trigger an ‘arrears’ issue. This can be a scary time, as your lender may start exploring the possibility of repossessing your home. However, this is an absolute last resort and there are always other options to first explore if you’re struggling financially. The majority of lenders will work with you where possible to get you back on track.
Let’s talk a little more about repossession. It’s the last case scenario if you cannot meet your mortgage repayments. It should be noted, however, that lenders do not want to repossess your property if they can help it. It’s a very time-consuming and expensive process for them.
Repossession is where the lender obtains the legal right, through the courts, to take your home away from you so that they can sell it in an attempt to recover their mortgage debt. This might be inevitable if you cannot afford your mortgage. However, before a lender can repossess your home, they must:
- Tell you how much you owe
- Consider any request from you to change the way you pay your mortgage
- Respond to any offer of payment you make
- Provide a reason for turning down your offer of payment within 10 days of you making the offer
- Give you a reasonable amount of time to consider any proposal they might make
- Give you 15 days’ written warning if they plan to start court action
- Tell you the date and time of a repossession hearing
- Let your council know within 5 days of getting notification of the date of the court hearing, in case you need to apply to the council as homeless.
Once a lender has done all of these things and you have not been able to reach an alternative solution, then the court may grant legal possession of your home to the lender. Having done this, the lender will often put the property up for auction in order to get a quick sale. This doesn’t necessarily result in the best price. If the sale doesn’t cover what you owe, the lender can still chase you for any shortfall.
What’s important to remember here is that a lender will always work with you to find an alternative solution before they repossess your home. It can be scary, but make sure you communicate with your lender as soon as possible, preferably before you fall into arrears. The majority of lenders won’t commence repossession proceedings until at least three months of arrears have occurred. They will always try to contact you first to try and find some sort of a solution. Ignoring the problem can feel like the easiest option, but working together with your lender is always the best thing to do
Speaking to someone
This leads us nicely to our next point – speak to someone. Ideally your lender. Lenders cannot start repossession proceedings whilst you are actively trying to resolve the situation with them. If, however, you chose to ignore their communications and hide letters under the sofa cushions, they can argue that you have failed to respond to their efforts to negotiate and therefore they have little alternative but to commence repossession proceedings. Missed repayments have far less impact if you’ve flagged them with your lender proactively.
Remember – lenders will usually be open to discussing your options and offering temporary and sometimes longer-term solutions that might help to avoid you being forced down the repossession route. These might include:
- Forbearance – reducing or even suspending your monthly mortgage payments for a period of time until you are back in a position to be able to resume your regular payments
- Repayment plans – these are designed to reschedule your arrears into an affordable plan to help you catch up on the missed payments
- Refinancing your loan – if your credit is good, you may be able to refinance your mortgage borrowing onto a better deal or lower interest rate, bringing your monthly repayments down to a more affordable level
- Lengthening the term of your mortgage – spreading your payments out over a longer time period will generally bring the monthly repayments down, making them more affordable
- Debt settlement – the lender may agree to accept less than the full amount owed on the loan in full settlement of your debt, however, this will be recorded in your borrowing history and will reflect negatively on your credit rating
- Switching temporarily to interest-only repayments – sometimes known as a repayment holiday. Your lender might agree to only charge you the interest cost on your mortgage for three or six months, giving you time to resolve your financial issues. This holiday period is usually then added to the end of the original loan term.
You may want to speak to a mortgage advisor before speaking to your lender. At Mortgage Light, we’re always willing to help our customers in whatever way we can if they are struggling. Whether it’s offering help on getting on top of your finances or guidance on the next steps to take with alerting your lender, do not hesitate to get in touch with us.
It may also be worth seeking some help from the various advice services available to you. They are free to access and there is no shame in reaching out. Plus, if your situation ever means you end up in court facing repossession, proving that you have been actively trying to solve your financial problems by speaking to a debt counselling agency can be very helpful in preventing or delaying repossession. Check out Shelter, National Debtline and StepChange.
Selling your home
It may sound extreme, but if you are facing serious financial troubles then you may need to consider a longer-term fix such as leaving your home. It may just not be feasible to stay and try and make the mortgage repayments work.
Sometimes, taking control of the situation and putting your property on the market yourself can be a good solution. That way, you can agree to a sale at the best price and repay your mortgage debt in full, plus arrears. Taking this action proactively will avoid having a repossession order registered against you, which could severely affect your chances of getting a mortgage again in the future.
If however, you owe more than your home is worth, you may have to consider a short sale. This is where you agree with the lender that they will accept the amount you sell your home for as full repayment of their loan, even though it is less than the amount you actually owe. Your lender would have to agree to write off the shortfall amount.
You could also explore something called ‘Deed in Lieu of Foreclosure’. With this option, your lender agrees to release you from your mortgage in exchange for you giving them the deed to your home. Both this option and a short sale will have a negative impact on your credit rating.
If you are currently receiving income support, income-based jobseeker’s allowance, income-based employment and support allowance, universal credit or pension credit, then you may be eligible for Support for Mortgage Interest (SMI).
With this scheme, the government makes interest payments on the first £200,000 (or £100,000 if you are getting pension credit), of your outstanding mortgage for the time that you cannot afford to pay. The government usually makes these payments directly to the mortgage lender, who will then lower your monthly mortgage repayments accordingly. The support is paid as a loan. You’ll need to repay this with interest when you sell or transfer ownership of your home. You can only use SMI towards your mortgage interest, not towards missed mortgage payments. Find out more about how the scheme works here.
It is always worth checking to see whether you are entitled to any government benefits that could help boost your income to meet your mortgage payments. Check your eligibility using here.
The cost of living increases can feel totally out of your control. However, there may be things that you can do to make money easier to manage during these difficult times.
The more organised you can be with your money, the better. Break down your incomings and outgoings. You may be able to unlock some spare cash. Cancel any direct debits you may be able to live without, such as streaming services and gym memberships.
Budgeting is all about understanding your money. Perhaps it could be useful to use an app that’s linked to your bank account and constantly tracks your money, such as the Emma app. Apps like Emma even show you where your bills have increased and comparisons of where you can get cheaper services.
Try to be organised with good visibility of your finances. That way, you should spot any potential financial issues looming. Don’t sit back and wait for the financial pinch to happen. Be proactive and take action early to seek advice and explore your options. It’s a good idea to get in touch with your lender at this point and see what support they might be able to offer.
Take out insurance
Income Protection pays out a regular pre-agreed amount based on your income if you are unable to work due to an accident or sickness. Check these policies carefully, however, as they will usually include some restrictions.
Speak to your council
You may be surprised at just how much support there is out there for those struggling financially. Your local council may be able to help with vouchers. These are designed to cover day-to-day essentials such as a hot meal, second-hand furniture and household appliances.
This support is known as ‘welfare assistance’ or the ‘Household Support Fund’. Each council runs their own scheme with its own criteria. You don’t have to already be claiming benefits in order to qualify for this support. If you do receive benefits, they won’t be affected. Find your local council and see what help they could potentially offer you.
Remortgage onto a fixed rate deal
Are you within the last 6 months of your current mortgage deal? If you are on a variable rate mortgage, it may be time to remortgage. Switch to a fixed rate deal if possible. It will allow you to budget for your mortgage costs each month. You know that your repayments won’t change for the duration of the deal.
In a time when your finances can feel out of control, a fixed rate deal may help. No matter how high the base rate or the lender’s SVR goes, your interest charge and therefore your monthly repayments won’t change throughout the agreed fixed period with a fixed rate mortgage.
As qualified mortgage advisors, we at Mortgage Light are on hand to help you with any aspect of your mortgage – including being unable to pay it. If you need a friendly face to speak to, then look no further. We can help you decide what to do next and advise on the best way to approach your lender. Financial struggles are not something you have to face alone. Simply get in touch with us and let’s take the next step together.