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Could you afford your mortgage if rates rise?
2022 saw a fleet of rises in the Bank of England base rate, which means that across the whole market, the mortgage rates today are not as competitive as they were in recent years. For some people, this could be a problem when they come to remortgage, as they may find that the interest rates available to them are no longer affordable.
Compare fixed rate mortgages
Compare fixed rate mortgages if you're remortgaging, a first-time buyer, looking for a buy-to-let or moving home
What happens if you can’t pay your mortgage?
If you can’t afford your mortgage repayments, one of the first things to look into is whether remortgaging onto a better rate is possible. In some cases you may have fallen onto your lender’s standard variable rate, which can push your payments up unexpectedly.
You could actually experience unexpected increases in your mortgage repayments at any time if you’re on any type of variable rate mortgage, so a fixed-rate deal may be best for you, if you’re on a strict budget.
If remortgaging is not an option, or won’t put you in a better position to be able to afford your repayments, your lender must attempt to make a reasonable arrangement to allow you to continue repaying your mortgage.
We’ll have a look at some of the ways your mortgage lender may be able to help you if you’re struggling to make mortgage payments later in the article. They are obliged to act fairly and consider any reasonable change you request to help you afford your repayments.
If you miss a mortgage payment
Lenders will typically write to you within 15 days of a missed payment, but it’s best to speak to them before you reach this point.
It’s recommended that you continue paying whatever you can afford to, even if you are unable to afford the full repayment.
This will show that you are doing all that you can and could help minimise the impact to your credit score and reduce the level of late any payment fees you accumulate. Mortgage interest is 'compounded', meaning the interest debt accumulates 'more interest' the longer you leave the full balance unpaid.
What are your options if you can’t afford mortgage payments?
If you can't afford your mortgage repayments it can be stressful and daunting, but there are a whole host of things that you could do to avoid losing your home.
Utilise any protection insurance
If you’re struggling to pay mortgage costs due to a loss of income, be sure to check whether you have any active policies that will cover you until you are able to work again. This could be a mortgage payment protection insurance (MPPI) or any other type of policy or benefit that covers your income in the case of sickness, injury or unemployment.
Always check the terms and conditions of any income protection policies carefully to see if you’re covered, as each will vary and not all insurance types cover all circumstances.
Talk to your mortgage lender
Many lenders, especially the larger high street banks, will have dedicated support teams to deal with customers who are experiencing financial difficulties. They are often understanding of certain changes in circumstances that may limit your affordability, such as job losses or a death in the family, for example, and will be able to explain your options.
Mortgage lenders will typically be able to extend some or all of the following options to those who are struggling to pay their mortgage in the short term:
Take a payment holiday
This is when you take a break from paying your mortgage at all, typically for a few months. It’s important to realise that you will still be charged interest and will need to catch up with the missed payments before the end of your mortgage term.
Some lenders will only offer a payment holiday if you have previously overpaid your mortgage, as flexible benefits such as overpaying your mortgage and the ability to take repayment holidays tend to be found together on certain products
Capitalising the arrears
This is usually done by reducing the amount you have to repay for a few months and repaying the difference at a later date by having it added to the outstanding mortgage balance
Extend your mortgage term
Extending your mortgage term will instantly reduce your monthly payments which could make your repayments more affordable to you.
Whether or not you are able to do so will depend on your age and the maximum repayment age set by the lender (if any)
“People who are remortgaging for the first time can be quite surprised by the increase in monthly costs. Some are willing to consider extending their term in order to save some money each month. Although it’s important to be aware that extending the term will cost more in interest in the long run.”
Aidan Darrall, Mortgage Expert at Mojo Mortgages
Switch to an interest only mortgage temporarily
Most people have a repayment mortgage for their own home, and whilst interest-only mortgages are not commonly used for residential property purchase nowadays, some lenders will allow you to switch to one temporarily to reduce your monthly payments until your circumstances resolve, for example, when you get a new job
With an interest-only mortgage you only pay the interest, rather than the interest and the capital. You can change back to a repayment plan once you are in a better position, but keep in mind that you will have additional capital to repay
Product transfer
Some lenders may let you do a transfer onto another one of their mortgage products that is more suited to your current needs. This might be a fixed-rate mortgage, so that you can minimise fluctuations in cost in the future or if you have substantial equity in your property, you may be able to negotiate a lower interest rate deal, as your loan to value (LTV) will have reduced
Support for Mortgage Interest (SMI)
The Support for Mortgage Interest facility is available across the UK to those receiving certain benefits. It provides a government loan to help with mortgage interest payments on up to £200,000 of your mortgage.
SMI is paid directly to your lender and covers just the interest, so the capital will remain outstanding unless you pay it yourself. Although often labelled as a benefit, SMI is actually a loan, so you’ll need to repay, with interest, when your circumstances improve.
It’s typically available to those in receipt of:
Income-related Employment and Support Allowance
Income based Jobseeker's Allowance
Income Support
Universal Credit
Pension Credit
Check for any benefits that might increase your income
Lots of people are entitled to benefits that they are unaware of, and remain unclaimed each year. This can apply to both working and non-working people. Any additional income may help you to cover some of your mortgage costs, which can resolve, or at least reduce your financial stress.
If you have recently lost your job, for example, jobseekers allowance may provide a slight increase in your income, but could also mean that you are entitled to SMI that you wouldn’t have been before. You can check which benefits you may be entitled to online.
The mortgage rescue scheme
There is no longer an active mortgage rescue scheme operating in England or Northern Ireland, however, if you have mortgage arrears and can’t come to an arrangement with your lender, you might be able to get help from a mortgage rescue scheme in Scotland or a mortgage rescue scheme in Wales.
Will my home be repossessed if I can’t pay my mortgage?
If you fall into mortgage arrears your home won’t automatically be repossessed, as your mortgage lender is obliged to help you, however, it certainly puts you at greater risk of this happening eventually.
Mortgage lenders are not allowed to go ahead with repossession unless all reasonable attempts to resolve the situation have failed. Most lenders will also prefer you to continue paying your mortgage, as it’s easier for them in the long run.
They are likely to be fairly reasonable and willing to come to an agreement where you pay off your arrears over a set period, perhaps 12 to 24 months. If you are unable to repay your debts, there are a number ot debt charities that can offer additional advice, such as:
Of course, as a last resort, the lender can repossess your home, however, in most cases a resolution is found. It’s important to be upfront with your lender from the moment you begin to struggle to pay your mortgage and do everything that you can to prioritise the repayments.