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Mortgage arrears and repayment problems

If you're struggling to repay your mortgage or you're in arrears, there are a number of things you can do – start with speaking to your lender.

Key points

  • If you're struggling with mortgage repayments, tell your lender as soon as possible
  • You may be allowed to extend the term of your mortgage, switch to interest-only or take a payment holiday
  • Repossession should be a last resort after every other option has been exhausted

Getting a mortgage can be a stressful experience, and keeping up with repayments once you've bought your dream home can be worrying.

Since the 2008 financial crisis, getting approved for a mortgage you can't afford is harder.

The 2014 Mortgage Market Review (MMR) was brought in to make the mortgage market more stable.

The affordability rules introduced by the MMR aimed to make sure that people could afford their mortgage repayments, and to reduce the number of people forced to default on their loans.

But the MMR doesn't protect against changing circumstances after taking out a mortgage – illness, job losses and family upheaval are just a few things that could make it difficult to pay a mortgage.

If you're struggling to pay your mortgage and are worried about going into arrears, there are steps you can take. But first, let's have a look at a few basics.

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What are mortgage arrears?

Simply put, this means you owe someone money.

Arrears is the legal jargon for a debt that's overdue after missing required payments. So if you missed your mortgage repayments for a month or two (or longer), you'd be in arrears. 

How many months of mortgage arrears before repossession?

Usually the odd missed payment might be forgiven, but missing repayments regularly is a bad habit to have, and it comes with worse consequences. 

It depends on the lender, but you could receive a repossession notice after four missed payments. But some lenders are stricter and might give you notice after just two missed payments. 

Your mortgage lender should only start court action against you as a last resort. This gives you the opportunity to do things like negotiate repayment agreements with them and seek financial advice. 

For more in-depth help and advice about home repossession, it's probably worth checking out charity sites like Shelter and Citizens Advice.

Can I sell my house with mortgage arrears?

Yes, you're usually able to sell your house even if you're in arrears with the mortgage. 

If your home is up for repossession, then it'll be put up for auction by your mortgage lender. With this method of selling, your lender might not get enough money for the property, so you'd have to pay to make up the shortfall. 

By selling the home yourself, you're more likely to get a higher price for it, and you won't have a repossession registered against your name.  

What should I do if I have repayment problems? 

If your circumstances have changed, and you find yourself struggling to keep up with your mortgage payments, don’t suffer in silence. 

Here’s a few things to consider that could help you out of a tricky situation.

Contact your mortgage lender

Your lender should be your first port of call. Let them know you're struggling with repayments to see if they can help.

Lenders prefer you continue making mortgage repayments, so they’ll usually try and find a way to help you keep paying them. 

Discuss ways of reducing your payments with your lender. If you currently have a 25-year mortgage, you might be able to extend it to 30 years or longer – that way, your monthly payments will drop.

Bear in mind that if you're in an older age group, lenders might be more reluctant to do this. Also, it does mean you'll pay more interest overall.

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Some lenders offer mortgage holidays after you've been paying for a certain amount of time, particularly if you've made any overpayments during that period.

Taking a few months off could give you some breathing room and time to address any solvable financial problems.

Speak to your lender as soon as you're worried about your repayments – don't leave it until it's too late.

If you've already fallen into arrears, a lender must give you full details within 15 days of the money you owe, charges incurred, and the amount left to pay on your mortgage.

They must also give you a reasonable amount of time to repay the money you owe, and tell you what will happen if you can't clear the arrears. Home repossession will usually be your lender’s last resort.

Do you have MPPI (income protection)?

If you have mortgage payment protection insurance (MPPI), depending on the circumstances and the policy, you could have your mortgage payments covered in full.

MPPI insurance is a type of income protection, and could cover your mortgage payments in cases of accident, sickness and/or unemployment.

Many plans could pay your mortgage for up to 12 months or until you return to work, but you can take out longer policies. It's important to read the terms and conditions of your chosen policy before taking out MPPI.

Government help with mortgage arrears – the SMI scheme

If you have a MPPI policy, you'll need to claim from that first, but the government may also be able to offer help if you're still struggling with your mortgage when your MPPI runs out or if you don’t have any. 

The government won't pay your mortgage for you, but the Support for Mortgage Interest (SMI) scheme may be able to cover your interest.

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This means you'll either need to find the rest of the money elsewhere or temporarily switch to an interest-only mortgage if your lender will allow this. Remember you'll still be required to pay off the remainder of your mortgage at the end of the interest-only period. 

If you're eligible, the government could meet interest payments on the first £200,000 of your mortgage for the time you can't afford them. The payments would be made direct to your lender. 

You won't be able to claim SMI if you have substantial savings, or if you own more than one residential property.

While SMI was previously a benefit, the government announced that it will take the form of a loan from April 2018 onwards.

This means that any claims made after April 2018 will have to be paid back to the government when you return to work, or when you sell your home.

Cut your costs

This may seem obvious and you've probably already done it, but if you're struggling to meet mortgage payments, take a look at your outgoings and consider how they can be trimmed back.

Whether it's spending a bit less on the weekly shop or cutting down the amount you drink, you can make big savings by making a few small changes.

Another top money-saving tip... One of the quickest ways to save on outgoings is to cut your bills. Whether it's gas and electricity, car insurance or home insurance, you may be able to save by comparing and switching supplier.

Look into debt management measures

If you're already saving as much as you can and still can't make your payments, you may need to explore other options.

Debt charities such as StepChange, National Debtline and independent agencies like Citizens Advice can offer free, impartial advice.

They may be able to tell you about something you haven't thought of, or show you a path you assumed was unavailable to you.

Selling or downsizing

If you don't think your circumstances will change any time soon, it may be worth thinking about selling your home or downsizing to a more affordable property.

Selling your home and renting for a time is preferable to defaulting on your mortgage and having your home repossessed. Plus it gives you the option to buy again when you're more financially stable.

If your credit rating has taken a hit since you bought your home, it might be worth looking into bad credit mortgages

While you shouldn’t need to remain a mortgage prisoner, you should only take out credit – such as a mortgage – if you can afford it... Otherwise you could find yourself getting into financial difficulty again and you'll be back to square one. 

Repossession

Ultimately, if you're unable to repay your mortgage, the lender may decide to take your home.

Repossession should be the last resort for lenders, but if you're in arrears and can't find a way to repay your debt, it may become a possible outcome.

Make sure you tell your lender as soon as possible if you're struggling with your mortgage repayments. That way, they'll be much more likely to help.

By Amy Smith