Personal Finance

The mortgage crunch: what happens if you fall behind on your home loan?

Lenders have agreed to be more flexible towards struggling mortgage borrowers amid concerns about rising interest rates. 

The agreement comes as the Bank of England hiked interest rates to a 15-year high of 5% as it aims to lower the rate of inflation. 

The higher rates are being passed on to borrowers which means that around 800,000 mortgage holders “face a crunch”, said the Daily Mail, when their fixed-rate deals expire over the rest of this year. A “further 1.6 million” will be hit in 2024, added the newspaper. 

The Resolution Foundation estimates that rising rates will mean borrowers “will face an average increase in repayments of £2,900” by the end of next year.

To combat this, chancellor Jeremy Hunt met with lenders and secured commitments under a mortgage charter that lenders will not repossess a borrower’s home in under a year from their first missed payment unless in exceptional circumstances. 

Lenders also pledged that asking for help won’t affect a borrower’s credit score and staff will be trained to find solutions to payment issues. 

As exciting as the measures sound, some appeared to “replicate policies that banks have already said they have in place”, said Reuters. 

Here is what may happen if you fall behind on your mortgage repayments and how to get support. 

What happens if you miss a mortgage payment? 

Many of us “fear our homes being repossessed”, said debt charity StepChange, but this is “always a last resort”.

When agreeing a mortgage contract, the deal is that the borrower makes repayments each month. 

If you fall behind by “two or more regular payments”, then you are defined as being in arrears, according to the Financial Conduct Authority (FCA). 

Once you fall into arrears, explained MoneyHelper, your lender must contact you “within 15 working days” to list the missed payments, show what you owe and tell you of any charges. 

A lender isn’t allowed to seek repossession “unless all other reasonable attempts” to resolve the situation have failed, added the financial website. You must also be given reasonable notice before any action is taken. 

How to get mortgage support 

Under FCA rules, lenders must treat their customers fairly, and that includes considering any requests to change how you pay your mortgage. 

However, “don’t wait for your lender to contact you”, said Citizens Advice. Addressing any repayment issues early can stop extra charges and reduce the risk of repossession. 

A lender will usually give you the option to pay what you owe in full or may consider an agreement to pay the arrears in instalments. One option is adding a little extra to future monthly payments to repay the arrears, the charity added. 

Paying back “some money is better than paying nothing”, said MoneyHelper, and will help reduce your arrears. 

It is worth checking if you have mortgage payment protection insurance, the financial website added. This type of cover is also called accident, sickness and unemployment insurance, and it can cover your mortgage repayments if your income has fallen because of redundancy, accident or sickness.  

You can get debt advice from charities such as Citizens Advice, StepChange and Shelter. 

People on benefits may even be able to access help from the Support for Mortgage Interest Scheme.

What difference will the mortgage charter make?  

It has always been possible to ask to repay the debt over a longer period, switch to interest-only payments or to take a repayment holiday if you are currently struggling with your mortgage or think you will in future.

The government’s charter agreement with lenders gives assurances that asking for help won’t affect your credit score. 

Additionally, borrowers who are up to date with repayments can switch to an interest-only mortgage for six months or extend their mortgage term and switch back to their original term within the first six months, without an affordability check and with no effect on their credit report.  

These are “worthwhile forms of help” said MoneySavingExpert’s Martin Lewis, but you should only take them if needed as there are risks. 

Extending your mortgage may lower your repayments, but you’ll still pay what you were originally meant to, “and likely more”, added Lewis, as the longer you borrow for, “the longer interest has to accrue”. 

Additionally, if you switch to an interest-only mortgage, you still need to make sure that you can also repay the full loan “before the end of the term”, explained StepChange.

Mortgage repayment holidays were popular during the pandemic, letting struggling borrowers request a three-month break on repayments until the end of October 2021.

Borrowers can still request payment holidays but there is no longer any requirement for banks to give a three-month break.

If a bank does approve this route, it is important to remember that the extra interest accrued will be added to the loan once you start repaying, explained ThisIsMoney, so “your payments will be more expensive once the holiday ends”. 

A last resort if you are still struggling to repay is to sell your home. 

Don’t just hand the keys to your home back to the bank, warned MoneyHelper, as you may still be responsible for the outstanding balance if the money raised by selling your home isn’t enough to pay off what you owe. Instead, make sure you have somewhere else to live and if you keep your lender updated, “they should give you a reasonable period of time to sell”.

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