What do you do if you can’t afford to pay your mortgage?

The Bank of England interest rate has just gone up again, this time to 5.25%. This rate is also known as the base rate and influences many other rates in the UK, including mortgages. 

If you currently have a fixed rate mortgage, the interest rate rise will not affect the amount you pay each month. But if you are on a variable rate, or your fixed rate mortgage is due to end soon, the amount you are paying could unfortunately increase significantly.

But what do you do if you can’t afford your mortgage payments? Many homeowners are finding themselves in this dilemma, and it can all feel very overwhelming. But there are options that may be able to help.

In this article we look at three potential situations you may find yourself in with your mortgage payments:

• You can pay your mortgage now but not if your payment increases.
• You are really struggling to pay your mortgage now.
• You can’t afford your mortgage and have stopped making payments.

For each of the above situations we will give you three options to consider that might just help you to get through.

You can pay your mortgage now but not if your payment increases

If you are in the situation where you are currently able to afford to pay your mortgage but worry that you won’t be if the interest rate goes up any more or if your fixed deal comes to an end, read on!

• Overpay now if possible

If you still have time left on your current mortgage deal, and are managing to make payments comfortably, consider overpaying. Most mortgage lenders will allow you to overpay up to 10% above your obligatory repayments. This can reduce the total amount of the mortgage that you still need to repay and, once you take interest into consideration, can make quite a difference. 

Take a look at Money Saving Expert’s Mortgage Overpayment Calculator to see the difference it could make to the total amount you owe if you overpay for the remainder of the term for your fixed rate mortgage.

• Save money to help with future repayments

An alternative to overpaying your mortgage, which is also more flexible, is to put any spare money aside into a savings account specifically to help with your mortgage payments in future. Interest rates are currently high so you should be able to find a savings account that gives you a good rate of interest. If you still have 12-18 months to go on your fixed rate mortgage, this money could help you to meet the increased repayments once your fixed term ends and hopefully see you through until interest rates come down again.

• Look for an interest-only deal

If your fixed rate mortgage deal is ending soon you may want to look at an interest-only mortgage. This would be a much cheaper payment because it means you are only paying the interest on the amount borrowed, instead of also paying off the capital as you would be if you had a repayment mortgage.

Just be aware that even though your mortgage repayments would be much more affordable, you should bear in mind that an interest-only mortgage is more of a short-term solution as you are not actually paying off any of the capital loan so your overall mortgage debt will not decrease. However, for the current times it could be a temporary solution to making your mortgage repayments easier to cope with.

You are really struggling to pay your mortgage now

If you are in the situation where you are starting to struggle to pay your mortgage and are worried that soon you won’t be able to, there are things that you can do that may be able to sort out your situation.

• Talk to your lender about potential options

The first thing to do is to get in touch with your lender to discuss the situation. This could result in a positive way forward, and will not affect your credit rating. Most lenders would rather know in advance if there is a potential problem rather than end up with you being unable to pay your mortgage.

Mortgage lenders may be able to offer various tailored types of support, including:

• Reducing your repayments for a limited period of time;
• Taking a payment holiday i.e. reducing your repayments to zero for an agreed period of time;
• Switching temporarily to an interest-only mortgage, as described above;
• Extending the period of your mortgage.

• Make money out of your property

Another potential way to get through your mortgage crisis is to fight back and make money from your property. Four possible ways to do this are:

• If you have space in your home that you never use, why not take in a lodger? Under the government’s rent-a-room scheme you can earn up to £7,500 per year tax free by doing this.
• If you have space but don’t want to accommodate a permanent lodger, you could look into short-term letting – such as AirBnB – to have occasional visitors to boost your income.
• If you don’t want people in your home but have outside space, you could consider renting out parking space through an app such as Just Park.
• As a last resort, you may want to think carefully about moving in temporarily with family and renting out the whole of your property for the next year or two until – hopefully – the economy calms down again.

• Look at other ways of reorganising your finances

Even if you get some kind of support from your mortgage lender to sort out your immediate short-term issue with repaying your mortgage for now, it’s still a good idea to look at other ways of reorganising your finances so that you don’t risk getting into financial difficulty again. 

Options to consider are;

• Create and stick to a monthly budget so that you are in control of your money.
• As part of this, increase income / decrease expenditure as needed.
• Check your benefits entitlement. Even if you are working you may be entitled to Universal Credit or other benefits. Check out the helpful guide to benefits on the independent MoneyHelper website. Also take a look at one of the following benefits calculators:
• Policy in Practice
• Entitledto
• Turn2us

You can’t afford your mortgage and have stopped making payments

If you are in the situation where you are unable to pay your mortgage and have stopped repayments, you need to take urgent action NOW! Unfortunately, as soon as you miss a mortgage repayment without notifying your lender you risk triggering the arrears process which could ultimately lead to ‘ repossession.

So if you are in this position, you need to seriously consider the following three steps:

• Talk to your lender and professional debt adviser

We covered earlier the importance of talking to your mortgage lender if you have problems, but if you have defaulted on one or more mortgage repayments this is critical. You need to contact your lender, particularly if you think it’s likely that you’re going to miss another mortgage payment. Otherwise there can be a detrimental effect on your credit report, as well as you falling into mortgage arrears i.e. a build-up of overdue payments. 

But if you talk to your lender, they may be able to help you to come up with an interim solution to the problem, such as the examples we listed above.

It’s also well worth getting in touch with impartial debt advisors who can help you to decide what to do. These are free, professional organisations who are well placed to offer help and advice.

The main debt help agencies include:

• National Debtline
• MoneyHelper
• Citizens Advice
• StepChange Debt Charity

• Check if insurance or benefits can help

At this point, also check if you have any form of mortgage insurance that could help. Often when you take out a mortgage, you are offered insurance policies that can help towards the cost of your mortgage in the case of accident, sickness or unemployment. If any of these circumstances are causing your inability to pay your mortgage and you have insurance, this could potentially save you.

Another option to check out is whether you may be entitled to any benefits. If you are on certain benefits, you may be eligible for government help – known as SMI (Support for Mortgage Interest) – if you can’t afford your mortgage repayments. SMI is paid as a loan which you would need to repay if in future you sell your home.

To be eligible for SMI, you would need to already be receiving benefits such as Income Support, Jobseeker’s Allowance, Employment and Support Allowance, Universal Credit or Pension Credit. 

You can find out more about SMI on the Gov UK website.

• Sell up and downsize

This is far from an ideal option but could be worth considering if you feel you have reached the end of the road. If you are really up against it and your home is in danger of being repossessed, it could be better to sell and either buy something outright with the remaining equity, or rent a home until the point where you are able to buy again, if you want to do so.

If you are determined to stay in your home, but are unable to make mortgage repayments on a long-term basis, you may risk your home being repossessed. Your mortgage is a secured loan provided by your mortgage lender. A secured loan means that the lender is legally entitled to take over your home if you are unable to repay the loan. So your mortgage lender could go to court to take your home if you have defaulted on mortgage repayments over a length of time.

Repossession is not a desired option for either the mortgage lender or the homeowner. A responsible mortgage lender will always try to work with you to find another solution. And most major lenders won’t attempt to repossess a home until at least 12 months after the first missed payment. However, if mortgage arrears continue and no other solution can be found then eventually the lender is likely to begin the process to repossess your home.

So if things get very serious and you can see no other way forward, it may be worth facing the difficult decision to sell your home, ditch the debt, and find another place to live.

We hope that the above tips are helpful in finding an acceptable way forward through your current mortgage payment situation.

And if you need any additional short term funding at any stage of the process, remember that Munzee Loans offer online loans that may be able to help.

Check back here soon for more lifestyle and financial tips from Munzee Loans.