What To Do If You Can’t Pay Your Mortgage

If you’re worried about how to pay your mortgage or have already missed payments, don’t panic. Various support options are available, and consulting with a specialist broker can help you identify the best course of action.

Reaching out to your lender

Many lenders understand that this is a challenging time for borrowers. While their priority is to have their loans repaid, many are willing to offer flexibility, such as moving the repayment date or reducing the payment amount. Contact your lender before you default on a payment, as this proactive approach can make a difference.

If you’re unable to make payments, sometimes a family member or someone close to you may be willing to step in and pay off your mortgage. If this is an option you’re considering, read our guide on what happens If you pay off someone else’s mortgage to understand the potential implications and benefits.

New support announced in June 2023

On 23rd June 2023, Chancellor Jeremy Hunt met with representatives from the UK’s leading mortgage lenders to discuss a package of support for mortgage holders who might struggle with their finances following the Bank of England’s decision to increase its base rate to 5%, a 15-year high. These measures reflect the current economic context and may be subject to change or vary in implementation by different lenders.

Below is a summary of the measures that were agreed upon:

• A 12-month grace period for homeowners who have missed mortgage payments before repossession action can be taken.
• Borrowers who switch to interest-only or extend their term can revert to their original deals within six months without impacting their credit reports.

A mortgage broker can advise whether changing your mortgage term or product type is in your best interest. Your lender can inform you about the options available to you.

Other options you could explore with your mortgage broker include:

Taking a payment holiday

A payment holiday allows you to temporarily lower or pause your mortgage repayments for a specific period, usually up to 6 months. Lenders will assess your financial situation and the likelihood of improvement in the coming months. It’s important to note that your monthly repayments will be higher once you resume payments, and taking a break could negatively affect your credit history.

During a payment holiday, your mortgage payments are paused, which may impact how lenders view your creditworthiness. Reporting can vary by lender, and while it may not directly affect your credit score, it could influence future lending decisions.

Even if it doesn’t directly lower your score, future lenders might see the payment holiday as a sign of financial instability, leading to stricter borrowing terms or higher interest rates.

Before deciding, it’s crucial to discuss with your lender how a payment holiday will be reported and consider the long-term implications for your credit health and borrowing abilities.

Using your mortgage payment protection insurance (MPPI)

If you’re unable to work at the moment, you could utilise your MPPI if you have it. Be sure to review the terms of your policy, as MPPI coverage varies widely in terms of eligibility, waiting periods, and the duration of payments.

This insurance is designed to cover your mortgage repayments if you’re unable to work due to illness, accident, or redundancy, giving you a reprieve until you can resume work.

Remortgaging

If your current monthly repayments look unsustainable in the long term, you could consider finding a more manageable deal during the cost-of-living crisis. Depending on the most competitive rates your broker can find, you could do this with your current lender or a new one.

Remember that remortgaging may involve additional fees, early repayment charges, or changes in loan terms that could affect the overall cost. It would require going through the mortgage application process again but it could be worth it if you can meet your repayments more comfortably.

Extending your mortgage term

The average mortgage term is 25 years, but many lenders offer terms of 30 years or even up to 40 years. Extending your mortgage term can reduce your monthly payments, but it will also mean paying more interest over the life of the loan and delaying full ownership of your home.

Additionally, extending the term might not be available to all borrowers, especially those nearing retirement age.

Switching to an interest-only mortgage

If you’re currently repaying your mortgage through capital repayment, where you pay off both the loan principal and interest, you could switch to an interest-only mortgage, if available. Be sure you have a clear repayment strategy for the loan principal, as not all lenders offer this option, and relying solely on property value appreciation can be risky.

This would significantly lower your monthly repayments but mean you’ll pay more interest over time and will need to have a plan to repay the loan principal at the end of the term.

Manage your finances

To avoid future mortgage payment difficulties, start by budgeting. Track all your income and expenses to identify unnecessary expenditures and reallocate funds towards mortgage payments and savings. Budgeting tools can help maintain financial discipline, ensuring spending aligns with income while prioritising mortgage commitments.

Building an emergency fund is also crucial. Aim for a safety net that covers 3-6 months of essential expenses, including your mortgage. Starting with whatever amount you can and contributing regularly helps mitigate the impact of unforeseen financial challenges, ensuring you can meet your mortgage obligations without resorting to debt.

Seek professional financial advice at the early signs of strain, such as frequent reliance on credit, to prevent minor issues from escalating. Financial advisors or debt counsellors can offer tailored solutions and strategies to help manage your finances effectively.

Staying informed about the financial landscape, including interest rate changes and market trends, allows you to make informed decisions about refinancing or adjusting your mortgage terms. Combining budgeting, saving, seeking advice, and staying informed gives you the tools to navigate financial challenges.

Applying for Support for Mortgage Interest (SMI)

Support Mortgage Interest (SMI) is a government loan that is available if you’re receiving benefits and not earning an income. It’s important to note that SMI is a loan that needs to be repaid with interest, typically when you sell your property. Additionally, eligibility and waiting periods for SMI can vary depending on the type of benefit you receive.

The loan covers the interest on your mortgage repayments at a rate set by the government. To qualify, you must have received income support, jobseeker’s allowance, employment and support allowance, universal credit or pension credit for a set period, which varies depending on the support you receive. Repayments resume when your benefits stop.

Struggling to meet your mortgage repayments isn’t something you have to face alone. Brokers have various tools and strategies to help you avoid defaulting or selling your home.

For more advice on how to make your mortgage repayments more manageable, call 0330 818 7026 or fill out an enquiry form to be matched with an expert broker for a free consultation.