What happens if you can't make a mortgage payment?
What to do if you can't pay your mortgage
People get into difficulty with their mortgage payments more often than you might think. It’s the most significant amount of money you’ll likely borrow in one transaction. Which means it’s one of the most expensive repayments. With this also looms one of the most significant risks: losing your house.
If you’re in arrears, struggling to keep up with your mortgage payments, and afraid you could lose your home, don't be.
Repossession of your property is a last resort; in fact, the Financial Conduct Authority (FCA) has even set rules and guidance to ensure this. However, it is essential to understand that mortgages are not like unsecured debts. An asset is attached to the debt, so there is a risk that the asset may be taken from you if your situation worsens.
We will now share seven actions to ensure you have the information you need to handle your mortgage arrears confidently and without fear.
Not in the mood to read? We got you covered. Listen to the rest with the YouTube link at the bottom of the page.
Step 1: Communicate with your lender.
No matter how worried or stressed you are, don’t bury your head in the sand and hope the mortgage lender will disappear. Keep communication open with your lender. It might feel tempting to hide the letters down the back of the sofa, but the best thing you can do is communicate with the lender, and always in writing. If you are proactively communicating with your lender, the immediate recovery actions they can take are limited.
Step 2: Lenders must be reasonable.
This is less of an action and more of a need to know. If you’re genuinely unable to keep up with your monthly payments, the lender has a responsibility to try to work out a plan with you. This is why open lines of communication are so important. They have to work with you to agree on a time period for which you can pay off any arrears.
Let's say your mortgage is £500 per month, and you have missed a month. The lender cannot expect a payment of £1000 the following month to make up for the missed payment. This would be unreasonable unless you have communicated that you can afford to make both payments.
The lender must work with you to understand your financial situation before establishing a payment plan. The lender must also give you a reasonable amount of time to consider any agreement before committing to it.
Step 3: Extend my mortgage term.
One of the first things you should do is consider extending your mortgage term to help you get back on track with your mortgage payments.
Let’s say you have 20 years left on your mortgage. By extending it to 25 years, the monthly payments should be lower, making them more affordable. If you're struggling to pay your mortgage, we expect your lender to proactively discuss this option with you. If not, make sure you ask them about it.
Step 4: Can I change my mortgage to interest-only?
Extending the terms isn’t the only option. If you’re currently on a repayment mortgage, the monthly cost will almost certainly be higher than an interest-only mortgage.
With an interest-only mortgage, you pay off the interest, not the money you originally borrowed. Discuss switching to a different mortgage type with your lender, as this could offer some immediate breathing room and make your mortgage more manageable.
Step 5: Deferred interest mortgage.
Instead of switching to an interest-only mortgage, you could negotiate with the lender to “defer the interest”.
However, this is only a short-term fix to reduce your mortgage payments while you get back on your feet and work through your financial difficulties.
Step 6: Support for Mortgage Interest (SMI)
Outside of the options a lender has within their power, there is a government scheme designed to help you and the lender. It’s called ‘Support for Mortgage Interest’, also known as SMI.
The government helps with the interest payments through this scheme, but only when you are really struggling. It’s one of the final steps to prevent you from losing your home, and it isn’t a handout but rather a loan on which you will be charged interest. The loan is then paid back at the point you sell your property.
The scheme is for when you have no other options. To learn more about the scheme's eligibility, visit https://www.gov.uk/support-for-mortgage-interest/eligibility.
Step 7: Can I sell my house with mortgage arrears?
Yes, you can.
The lender has to give you a reasonable amount of time to attempt to sell the property. You’ll have to notify the lender that you’re putting the property up for sale and that a realistic price has been set.
Where possible, try to sell the property yourself the traditional way. Don’t be in the hands of a lender, as the lender will be looking for a quick sale. In the best-case scenario, the sale will clear your mortgage. However, in the worst-case scenario, the sale won’t clear your mortgage, leaving you with a remaining mortgage debt and no asset. This is called a shortfall.
That's a lot of info...
There’s a lot of information to take in here, and this is just the simplified version. We want you to feel confident with actionable options that you can pursue if you are struggling with mortgage arrears. We don’t want to bombard you with technical information.
That said, here is a link to the FCA rules and guidance. We try to keep the information we provide as simple as possible, but we always encourage you to do further research before you take action.
It is essential to communicate with your lender, retain control and remain calm
Don't forget to read The Real Debt Guy's final thoughts below!
The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.
