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What happens if you can't afford your mortgage?
Many mortgage holders in the UK have seen their rates rise recently - in some cases interest rates have increased so much that people can't afford mortgage repayments anymore. We look at what happens if you can’t pay your mortgage, how to cope with the situation, and what help is available to those in this position.
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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.
According to UK remortgaging statistics, the average UK SVR in November 2022 stood at 5.88% (the highest it has been over the last three years). This figure fell in May 2023 to 5.71%.
However, throughout the latter half of 2022 and in 2023 to date, we've seen a fleet of rises in the Bank of England base rate. This means that the mortgage rates available now, whether you're looking to buy or remortgage, are much higher than they were in recent years.
For some people, this has led to both their current rate, and those available through remortgage becoming unaffordable to them. The government made an arrangement with mortgage lenders in June 2023 to help those struggling to maintain their homes by ensuring that:
Customers are not forced into repossession within 12 months of their first missed payment
Mortgage holders can switch to interest-only or part and part repayments for up to six months, to temporarily reduce their monthly costs
Mortgage terms can be extended up to a maximum of 40 years (for 6 months) to help temporarily reduce monthly repayments
Lenders will perform these changes without questions, affordability checks or credit checks
Customers that are up to date with their repayments can switch to a new fixed-rate deal without an affordability check
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.
What are your options if you can’t pay your mortgage?
If you can't afford your mortgage repayments it can be incredibly stressful and daunting, but there are a whole host of things you can do to avoid losing your home:
Talk to your mortgage lender
This should always be your first step when you can't pay your mortgage. Many lenders, especially the larger high street banks, 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. They will also be aware of the enhanced support currently available since June's mortgage concern summit.
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, typically for a few months. It’s important to understand that you'll still be charged interest during this holiday and will need to repay any missed payments before the end of your mortgage term.
Some lenders only offer payment holidays if you've previously overpaid your mortgage. Benefits such as overpaying your mortgage and the ability to take repayment holidays often tend to be found together on more flexible mortgage deals
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 them affordable.
Whether you're able to and how much by, depends on your age and the maximum repayment age set by the lender (if any). Remember, you can also do this on a temporary basis, and reduce the term again once your financial circumstances are better
“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
Interest-only mortgages are not commonly used for residential borrowers, but some lenders still provide them to those with a higher income. They may also allow you to switch to one temporarily to reduce your monthly payments until your circumstances resolve, for example, when you get a new job.
At the current time, most lenders have agreed to do this for at least six months, in line with government pressure from the affordability summit. You could also choose a part and part mortgage, which means you'll repay some of the capital and some of the interest, but will essentially owe less at the end of the term than when using an interest-only mortgage
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. Lenders are currently encouraged by the government to allow borrowers to move onto another of their fixed-rate mortgage without the need for credit checks or financial assessment
Utilise protection insurance
If you’re struggling to pay your mortgage due to a loss of income, be sure to check whether you have any active policies that will cover you until you're able to work again. This could be mortgage payment protection insurance (MPPI), but also any other type of policy or benefit that covers your income in the case of sickness, injury or unemployment.
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.
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.
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. Keep in mind that in June 2023, most lenders agreed not to begin repossession proceedings within the first 12 months of their first missed payment - so don't panic, and speak to your lender as soon as possible.
Even beyond this additional measure, mortgage lenders are not allowed to go ahead with repossession unless all reasonable attempts to resolve the situation have failed. Most lenders 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're unable to repay your debts, there are a number of debt charities that can offer additional advice, such as:
Of course, as a last resort, the lender may be able to 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.
