Mortgage arrears are a priority debt that will need addressing before any other monetary commitment. Turbulence in the UK’s economy has put the squeeze on household budgets. So it's difficult for many homeowners to keep on top of debts and everyday bills.
As a nation our biggest problem right now is rising inflation. The cost of living is soaring - the Bank of England expects inflation to hit 5% in 2022. Energy bills, food prices and other costs are all rising rapidly. Even with the best mortgage rates in place, it might be a struggle for some in the months ahead.
Whether you are a first time buyer or have an additional buy-to-let mortgage, being under financial pressure means it can be difficult to prioritise your monthly mortgage payment ahead of other commitments. But missing your mortgage payment can have the most severe consequences.
Mortgage arrears explained
Falling behind on your mortgage will see you fall into 'mortgage arrears' If you miss a payment it will be recorded on your credit report and damage your credit score. It will also affect your chances of being accepted for other types of borrowing - including mortgages, loans, credit cards or phone contracts - in the future. Ultimately, failing to pay your mortgage could see you lose your home if the lender seeks repossession.
Homeowners were granted payment holidays during the pandemic, which did not affect their credit history. However, this was a one-off arrangement that has now come to an end.
How to avoid Mortgage arrears
If you’re feeling the pinch, don’t panic. There’s lots of steps you can take to avoid falling into mortgage arrears.
1. Take action
The most important advice of all is to act swiftly. If you can see a problem arising - because you’ve suffered redundancy, say, or seen your working hours reduced - don’t bury your head in the sand. Call your mortgage lender straight away to discuss your options, rather than leaving the conversation until you’re about to miss a payment.
2. Be on top with budget planning
Many lenders - as well as resources such as Moneysavingexpert offer budgeting tools. These will help you to get a clearer picture of what you earn and what you spend.
The online tools can help you pinpoint any non-essential spending that could be reduced or cut out. You can also find a budget planner on the government’s website moneyhelper.org.uk. You might find that by reducing your spending in other areas you can still afford to pay your mortgage on time.
3. Try tailored support
If you still can’t see a way to pay your mortgage in full, your lender will have a dedicated team of advisers on hand to talk to you.
Some mortgage deals come with the option of taking a payment holiday. Your lender will let you know if this available to you. Never cancel your direct debit without speaking to your lender first or you will end up in Mortgage arrears and create a black mark on your credit report.
Other options include extending your mortgage term to lower your monthly payments. This will increase the amount of interest you pay back overall, but could buy you some valuable breathing space.
Alternatively, your lender might temporarily switch you from a capital repayment mortgage to an interest-only mortgage. A capital repayment mortgage means you’re paying back both the debt and interest. If you switch to interest-only, your mortgage debt will not reduce, but your monthly cost will be lower.
4. Consider debt consolidation
Taking out more debt to repay expensive credit cards and loans may free up some cash in the short term, but you could end up paying back much more interest by spreading those debts over a longer term. You may also find that you start to rack up credit card debt again if you have not addressed your spending habits. Speak to a free debt advice professional before going down this route.
5. Seek free debt advice
There’s no need to pay for debt advice. There are lots of free services and charities that can help you such as Moneyhelper, National Debtline, Citizens Advice and Stepchange.
6. Payment plans and missed payments
If you’ve agreed an arrangement with your lender to put your payments on hold or to pay less than your contractual payment each month this will be recorded on your credit report and affect your credit score.
What’s called an arrangement flag will remain on your credit file for three years after the arrangement has ended. Any payments you make that amount to less than your monthly payment will show as arrears, as will any payments you miss altogether.
Missed or late payments linger in your credit history for six years and can put off other lenders from offering you credit. It suggests you’re in financial difficulty and may have trouble paying back future agreements.
If you don’t stick to the lender’s payment plan and it has exhausted all other ways to support you, the lender can take you to court and repossess your property. Repossession is an extreme action, however, and used by lenders as a last resort.
7. Repair credit
Lots of people go through periods of financial hardship at one time in their lives. If it happens to you, take action to minimise the damage to your finances and credit. But if you do end up with black marks on your credit file, all is not lost.
Just because black marks stick to your file for six years it doesn’t mean you’ll be denied credit for that long.
Specialist mortgage lenders will consider offering you a home loan two years after your arrears were registered, providing you have kept up to date with your payments since then. You will have to pay a more expensive interest rate than high street banks would offer. But by rebuilding a good track record of mortgage and bill payments you’ll not only repair your credit history but your credit score too.
An independent mortgage broker can help you manage these issues to get the best possible deal, even if your application is non-standard.