When an individual or a couple applies for a mortgage, stringent checks take place to ensure they do not overcommit themselves financially and the lender can be confident the loan will be repaid within the terms agreed. In 2014, the Mortgage Market Review (MMR) made it even more challenging for borrowers to prove their eligibility for a mortgage, by introducing “stress tests” to ascertain the individual’s ability to make repayments if interest rates increase.
However, if you manage to secure a mortgage but subsequently a change in personal circumstances — such as a job loss or a divorce — means you can’t manage repayments, what are your options?
What Happens If I Can’t Pay My Mortgage?
Before we consider the options available to anyone struggling to make their repayments, it’s important to understand the consequences of falling behind with your mortgage.
A homeowner who has overdue mortgage payments is “in arrears”. If you miss a payment, the mortgage lender will contact you to discuss any problems you may be having with repayments and to identify a plan for getting you back on track. Falling behind with one or two payments does not necessarily result in repossession of a property. It is to the benefit of the lender and borrower to resolve the issue and find a way forward.
Most lenders will be happy to work with the borrower to review their finances and agree a “repayment plan”. A lender may not always accept such a proposal, or they could suggest an alternative plan of action. This is typically a short-term plan — up to six months — with an agreed end date. During this time, the lender will accept reduced payments to help you get back on track.
If the homeowner’s change in circumstances is permanent and they cannot resolve it with a short period of reduced payments, the lender is likely to start court action to repossess the property. The Financial Conduct Authority (FCA) regulates all mortgage lenders and they must abide by the Mortgage Conduct of Business (MCOB) rules that stipulate how they must treat customers. The MCOB rules make clear repossession must only be used as a last resort if all reasonable attempts at resolving the situation have failed.
If a lender contravenes these rules, the borrower can submit a formal written complaint to the mortgage company. If there is no response within eight weeks — or an unsatisfactory response — the complaint can be escalated to the Financial Ombudsman Service (FOS). If the FOS finds the lender at fault, they could insist court action ceases and a repayment arrangement is agreed.
How to Avoid Repossession
The homeowner will want to do all they can to avoid repossession and the lender is only authorised to repossess as a last resort. So what options are available to help borrowers prevent their home being repossessed?
1. Speak to Your Mortgage Lender. The worst thing you can do is ignore the problem and hope it will go away. It won’t. As previously discussed, lenders are required to consider reasonable requests for a short-term revised repayment plan. If a settlement is being “actively” negotiated, repossession proceedings should not commence. A homeowner who ignores all the lender’s attempts at communication is not “actively” negotiating and the lender will be within their rights to commence repossession proceedings.
Speak to your mortgage lender as soon as a problem with repayment arises. Review your income and expenditures, identify areas for cutting costs and propose a plan for repaying the arrears. Your lender must consider any proposal you make. They do not have to accept it, but together you can agree a mutually agreeable plan to repay any money owing and overcome a temporary financial situation.
2. Seek Professional Advice. Several organisations offer free debt management and legal advice.
Some charities can help people in need of debt management advice, such as Step Change, the National Debtline, Christians Against Poverty or your local Citizens Advice Bureau. All of these organisations have highly trained advisors who can offer free and impartial advice to people struggling with debt, including those facing repossession of their home. They will help you to review and prioritise any existing debts, which is the first step towards proposing repayments to your lender.
3. Check Your Eligibility for Benefit Support. If a change of circumstances — such as a job loss or illness — has caused your current financial difficulties, you may be eligible for government support. Contact your local benefits agency to find out if you’re eligible.
There are various benefits available to homeowners forced out of work due to illness, injury or reduced hours. For example, you could claim Support for Mortgage Interest (SMI) to help with interest payments or a Reduced Earnings Allowance to increase your income enough to repay the arrears and cover future mortgage repayments. The Citizens Advice Bureau can provide free advice on the benefits available and your eligibility.
4. Remortgage. Find out if you’re eligible to remortgage. This essentially means switching to a new mortgage deal, either with the same lender or a different one. Remortgaging can be a good way to reduce the monthly repayment fees and make the mortgage more manageable for your current financial situation.
However, be sure to check if your current lender will impose any early repayment or exit fees, which can be substantial. There may also be other fees to pay, such as product fees (also called “arrangement”, “reservation” and “booking fee”), that could counteract the savings you make by remortgaging.
5. Switch to a Different Mortgage Type. Most lenders will allow customers to switch from one type of mortgage to another. Moving to an interest-only mortgage could reduce the monthly repayment costs for a homeowner who currently has a repayment mortgage.
Another option is to ask your lender to extend the term of your mortgage over a longer period. The monthly repayments for a 30-year mortgage will be lower than those for a 25-year mortgage.
6. Identify New Income Streams. If your income has reduced or unavoidable expenditure increased, resulting in your inability to pay the mortgage, consider ways to earn a little extra. It may be possible to generate a second income from your property, for example, by taking in a lodger or renting out your driveway. These options require no extra demands on your time or wallet yet could provide enough cash to repay the arrears and keep up with payments moving forwards.
7. Sell Your House Fast. If your financial situation is unlikely to improve and none of the options above can help clear your mortgage arrears or ensure you can consistently make future payments, consider using a house buying service to sell your house fast.
Our team of experts at House Buyer Bureau only require a few details about your property before we can provide a cash offer. There are no legal, valuation or estate agent fees to pay and once a firm cash offer is made, the funds can be in your account in as little as seven days. Selling a house on the open market can take months and almost half of all sales in the UK fail before completion.
Provided you have equity in the property, the proceeds of the sale can help clear any mortgage arrears and fund the deposit for a more affordable home or rented accommodation. The cash offer will be lower than the market value of the property, but you’ll avoid repossession and walk away with a sum of money. See an example of what we pay compared to the proceeds of selling via a more traditional route. The difference is surprisingly small!