WITH the cost of living soaring, more people than ever are struggling to pay their bills each month.
But what happens if you can't pay your mortgage?
Going into mortgage arrears is very serious.
If you can't pay back the debt that you borrowed to buy your house, then ultimately the lender who lent you that money has the right to repossess your property in order to recoup its cash.
But they can't do this unless all reasonable attempts to resolve the situation have failed, according to the Financial Conduct Authority.
If you think next month might be a struggle, the key is to act now, said Paul Broadhead, head of mortgage policy at the Building Societies Association (BSA).
The BSA and the Money Advice Trust have produced a new booklet giving guidance on what to do if you can’t pay your mortgage, or think you might struggle to make your payments in the coming months.
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Paul said lenders are very sensitive to the rising number of people facing a squeezed household budget, and if they know there is a problem they will do everything possible to help.
Here is his advice:
Contact your lender early
As soon as you think you will have a problem with your monthly mortgage repayment – whether you can’t pay anything, can’t pay all of your monthly payment or can’t pay it on time – get in touch with your lender straight away, Paul said.
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The earlier you start talking to each other the more likely it is that a solution can be found.
“It's really difficult for people to face up to the fact that they might not be able to make that payment,” he said.
“I think people bury their heads in the sand, and then the situation gets worse, and then it's really difficult for people to pick up the phone and say, look, I'm struggling.
“But if you engage with your mortgage lender, there are more options for them to support you.”
The same applies if your lender gets in touch with you – don’t ignore them, instead pick up the phone or make an appointment to see them.
Assess your situation
Working out a realistic budget might make a big difference to your spending, and will help you see exactly what you might be able to afford in terms of mortgage payments.
It makes sense to prioritise payment of your essential household bills like your mortgage, other loans secured on your home, council tax, fuel bills and food.
There are lots of budget planners available online which provide a framework to work out what you are spending each week or month.
“It is also important to check that you receive everything that you are entitled to,” Paul said.
“There have been a number of interventions from the government recently designed to help people with the cost of living crisis, and it has been difficult to keep track of what all of those interventions are.”
He suggested starting with Citizens Advice, which would be able to advise on what you might be able to claim.
For example, if you are on certain benefits, you might qualify for support for mortgage interest, which is a cheap loan from the government.
Although this might help you in the short term, it will mean you pay back more in the long term as you will be charged interest on the loan, so you will need to weigh up your options.
Other organisations including Turn2Us and MoneyHelper will also be able to help you.
Keep in contact
No matter what actions you are taking, keeping your lender up-to-date about your financial situation will help them to help you.
Be honest about what is going on, tell them what you are doing and let them know if there are further changes to your circumstances.
Show that you are willing to pay what you can
Once you approach your lender, they may be able to change the terms of your mortgage to help make it more affordable to you.
This is why it is very helpful to have already drawn up a budget, so you can tell the lender what you can realistically afford.
“Depending on the circumstances, there are different solutions,” Paul said.
“If this is going to be a temporary problem for perhaps two, three, four months, then your lender may be able to reduce your mortgage payments over that period, and you can catch them up afterwards.”
If your problem is more sustained, for example you have developed a long-term health condition which means you can no longer work, then you can ask to change your loan repayment plan.
“That may mean extending the mortgage term beyond where it should have ended in the first place to make the repayments more sustainable for longer,” Paul explained.
He suggested being honest with your lender at the outset is going to help.
“If your mortgage should be £400 a month and you think you can pay £350, then that amount needs to be sustainable,” he said.
“If it’s not, it isn’t going to do you or the lender any favours.”
Paying something also shows you are working to fix the problem.
“It's important to make sure you keep making that lower payment each month because that shows that you're doing what you can,” he said.
Explore all your options
Lenders take action to repossess someone’s home only as a last resort, and will give you a range of options before they do that.
If you are worried that you might not be able to afford your mortgage repayment if the interest rate goes up, talk to your lender about whether a switch to a fixed-rate mortgage would be the right option for you.
“Your lender can take action straightaway, identify what the problem is, find a solution and apply it to your next monthly payment,” Paul said.
This could be as drastic as moving to an interest-only mortgage, or moving from a variable to a fixed rate deal in order to bring your monthly payments down to a more manageable level.
He said as long as you stick to what you have agreed, your lender won’t repossess your home.
Debt advisors – where to turn for help
Debt advisors are organisations that give consumers independent, impartial debt advice, for free. They can help you take back control of your finances.
- Face-to-face services, like your local Citizens Advice and local authorities
- Independent telephone helplines, such as National Debtline (0800 808 4000), and Business Debtline for people who are self-employed and small businesses (0800 197 6026)
- Online and web chat services, such as www.nationaldebtline.org and www.businessdebtline.org
- Other charities like StepChange Debt Charity
- MoneyHelper has an online search tool which helps locate free debt advice in your area
Take advice from trusted sources
Make sure you take advice only from people who have the relevant expertise, Paul warned.
Your lender will be able to help, and you can also get free, independent advice from organisations like National Debtline, Citizens Advice, Shelter and other free, independent debt advisers.
These organisations won’t judge you or make you feel bad, they will help you find ways to manage your debt.
But there are companies out there which want to exploit people in financial difficulties, Paul said.
“You see quite a lot of adverts online, particularly when people are facing challenges about income and expenditure and the economy's not in a great position for most households.
“You will always get people that are running scams or who are looking to make money out of your situation.
“Official organisations will go through your budget with you, can negotiate with your creditors to make sure that you're paying what you can afford, and there is no charge for it.”
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Be very wary of any companies which charge you for help, he advised.
“I can't stress this enough: take reputable independent advice into your circumstances rather than trying to sort it out yourself because you’re worried what will happen if you speak to your lender.”
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