As a homeowner, it’s generally your mortgage that helps to keep the roof over your head. If, however, you are unfortunate enough to miss a repayment on your mortgage, your lender will initially report this to a credit reference agency as a ‘delinquency’.
This information is shared amongst the various different credit agencies and will remain on their records for at least six years, negatively affecting your credit score and therefore your ability to get any other finance elsewhere. 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, which can start the clock towards possibly having your home repossessed by your lender. However, there are always options to explore if you are struggling financially, and the majority of lenders will work with you where possible to get you back on track.
First step – speak to your lender
If you are having trouble making your mortgage repayments, your first step should always be to contact your lender and alert them to this. 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 it with your lender proactively.
Remember – lenders don’t want to repossess your property. It’s very costly and time-consuming for them, so they will want to try and find a way to help make your mortgage borrowing more affordable and manageable for you. More often than not, they will 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 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, say, three to six months, giving you time to resolve your financial issues. This holiday period is usually then added on to the end of the original loan term.
What if I can’t afford to stay in my home?
If you are facing serious financial troubles, then it might be that staying in the home and trying to make the mortgage repayments just isn’t feasible. If this is the case, you may want to consider some longer-term fixes.
For example, if you are facing repossession, it may make sense to take control of the situation and put your property on the market yourself, so that 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.
Can I get government support?
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, which you’ll need to repay with interest when you sell or transfer ownership of your home. You can only use SMI towards the interest on your mortgage, and 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 here.
I’m facing repossession – how does it work?
The last resort and worst-case scenario if you cannot pay your mortgage is that your home gets repossessed. This means that 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.
Most lenders do not want to repossess property as it is a very time-consuming and expensive process for them, however, it might be inevitable if you cannot afford your mortgage and if you fail to communicate with them, leaving it as their only option. Major lenders won’t commence repossession proceedings until at least three months of arrears have occurred, and they will always try to contact you first to try and find some sort of a solution first. 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
- Give you any reasons 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
- Given 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 the difference.
How can I avoid getting into arrears?
Financial hardship can hit even the most organised of people, particularly in times of economic strife. There are a number of things that you can proactively do to help make sure that your finances are as strong as possible to avoid getting into arrears:
- Budget – keep your money as organised as possible and ensure that your important bills, such as your mortgage, get paid each month as soon as you get paid so that the money is always available to cover them. Budgeting should also help to identify where your spare cash lies so that you can become a regular saver
- Savings – put a regular amount each month into a savings account, so that you build up a cash reserve in case of emergency. Try to have savings sufficient to cover six months of your normal monthly bills, so that you have this to fall back on should you be made redundant or be unable to work. These savings will give you some breathing space whilst you find another job or make other longer-term arrangements
- Be proactive – if you foresee financial difficulties looming, then take early action to seek advice and explore what support and forbearance might be available from your lenders if needed
- Benefits – check what is available to you from the government. If you lose your job, sign on at the local Jobcentre to receive jobseekers allowance
- Insurance – there are products out there designed to pay out in times of financial hardship, such as Mortgage Protection Payment Insurance (MPPI) which covers your mortgage repayments for you if you lose your job or are unable to work due to an accident or sickness, or Income Protection, which pays out a regular pre-agreed amount based on your income if you are unable to work due to accident or sickness. Check these policies carefully, however, as they will usually include some restrictions.
If you are struggling with your finances, you probably ought to consider seeking some help. There should be no shame in doing this and there are plenty of advice services that provide free guidance. 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 or StepChange.
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.