Mortgage Arrears – Understanding the Impact and Finding Solutions
As a homeowner, falling behind on your mortgage payments can be a stressful and overwhelming experience. Mortgage arrears are simply missed mortgage payments.
These arrears can have a significant impact on your finances, credit score, and mental health. This can be a particularly daunting issue given today's economic uncertainty, which has made it harder for many people to stay financially afloat. If you're struggling with your mortgage payments, you're not alone.
In fact, research shows that a growing number of homeowners are experiencing mortgage arrears, especially in times of economic hardship. According to UK Finance, 75,170 homeowner mortgages across the UK were in arrears of 2.5% or more of the outstanding balance. Read more here.
There are a number of strategies and resources available to help you address your mortgage arrears and prevent further financial difficulties. By taking proactive steps to address your arrears, you can avoid foreclosure and regain control over your finances.
In this article, we'll discuss the impact of mortgage arrears, the common causes of arrears, and explore the steps available to help you manage your mortgage payments.
What are Mortgage Arrears?
Mortgage arrears refer to the situation where a homeowner has missed one or more mortgage payments. Typically, mortgage arrears occur when the homeowner experiences financial difficulties or changes in their personal circumstances.
Causes of Mortgage Arrears
Unemployment or Reduction in Income
First, if you have lost your job, it can cause mortgage arrears as there is a decline in household income. This can make it difficult to make ends meet, even if you are able to withdraw your emergency savings or find another job.
A reduction in income may change your entire financial situation, your budget and living expenses. This can make it hard for you to adjust and make the necessary changes in time to avoid missed repayments, which may result in arrears.
Illness or Other Medical Reasons
You may have missed work for a long period of time due to illnesses or medical conditions that would have a negative impact on your income. As a result of high medical bills, you may find it difficult to pay other bills, including your regular mortgage payments.
Increase in mortgage interest rates
When interest rates rise, the monthly payments on a mortgage also rise. This can make it difficult for some borrowers to afford their mortgage payments, especially if they are already struggling financially. As a result, some borrowers may miss payments or even default on their mortgages.
If you’re on a fixed-term deal, then this may not apply to you. However, a variable rate deal and a standard variable rate deal are directly affected by the interest rates set by the Bank of England. Thus, hikes in these rates can lead to more difficulties in paying back your mortgage regularly, and on time.
Consequences of Mortgage Arrears
Mortgage arrears can have a significant impact on your finances and credit score, including:
Late Fees and Interest Charges
When you miss a mortgage payment, your lender may charge a late fee, and interest will continue to accrue on your outstanding balance. These charges can add up quickly across your mortgage term, making it harder to catch up on your payments as the interest payments will increase in amount and frequency.
Damage to Your Credit Score
If you miss a payment on your mortgage, your arrears will be reported to the credit reference agency, which could damage your credit score, in turn affecting your ability to borrow in the future. A lower credit score can affect your ability to get approved for loans, credit cards, or even rental applications.
Legal Action
If you continue to fall behind on your mortgage payments, your mortgage lender may take legal action to repossess your home which may require a court hearing for you too, adding to your legal costs. This can be a stressful and emotionally challenging experience, as you may lose your home and face financial difficulties.
Stress and Mental Health Issues
Financial difficulties can be a significant source of stress and can lead to mental health issues like anxiety and depression. Mortgage arrears can cause significant strain on your mental health, and it's important to seek support and guidance during this challenging time.
How to deal with mortgage arrears
If you are struggling to pay your mortgage and don't have enough money to meet the required payment date, there are several options available to you. Here are some steps you can take to deal with mortgage arrears:
Contact your lender
The first thing you should do when you realise you are falling behind on your mortgage and missing payments is to contact your mortgage lender. Your mortgage company must treat you fairly and most lenders are willing to work with you to find a solution to your financial difficulties. They may offer you a forbearance or repayment plan that allows you to catch up on your missed payments over time.
Seek financial and debt advice
If you are struggling to make your mortgage payments, it may be helpful to seek the advice of a financial counselor or debt advisor. They can provide free debt advice and can help you develop a budget, negotiate with your lender, and explore other options for managing your debt. You can reach out to StepChange, MoneyHelper, National DebtLine and Citizens Advice.
Mortgage payment protection insurance
The mortgage protection insurance is a type of income protection insurance that offers to pay 100% of your mortgage payments replacement income if you’re unable to work, usually due to illness or injury.
This safeguard payment arrangement is subject to you having a mortgage insurance policy. If you do, you may claim this which can be a good income support for a short-period of time.
You may just want to cover the cost of your mortgage, but with some providers you also have the option to add an extra 25% to cover bills and other expenses too. Providers tend to set maximum limits of between £1,500 and £2,000 a month.
Consider refinancing
If you have missed repayments beyond a reasonable period, refinancing your mortgage can help you lower your monthly payments and make your mortgage more affordable. However, refinancing may not be an option if you have poor credit or too much debt.
Sell your home
Although many of us fear our homes being repossessed, repossession is always a last resort. If you cannot afford to keep your home, you may consider selling it to avoid foreclosure, if it becomes an extreme, unmanageable situation and the lender repossesses the property. Selling your home can be a difficult decision, but it may be the best option if you are struggling to make your mortgage payments.
Government help
If you're continually struggling to make mortgage repayments, you may be eligible to the government mortgage rescue schemes stop you losing your home if you have mortgage arrears that you can’t pay off.
How to Avoid Mortgage Arrears
Obtaining adequate insurance coverage: First, if you have insurance, you may be able to get financial assistance if you are unable to work due to illness or injury. This can help you to continue to make your mortgage payments even if you are not earning any money.
Building an emergency fund: An emergency fund is a cash reserve that you can use to cover unexpected expenses, such as job loss, medical bills, or a car repair. It is important to have an emergency fund in place so that you are not forced to go into debt if something unexpected happens. Think of it as a reserve cash balance to pay off your household bills and other living expenses at times of need
Refinancing for lower interest payments: if you can get a lower interest rate, this will reduce your normal monthly payment. However, there are some fees associated with refinancing such as appraisal fees, origination fees, and closing costs. So you'll need to make sure that the savings are worth the upfront costs.
Conclusion
Mortgage arrears can have a significant impact on your finances and credit score. If you are experiencing mortgage arrears, it is important to take action as soon as possible. Contact your lender, seek financial advice, consider refinancing, or sell your home if necessary. By taking these steps, you can avoid foreclosure and find a solution that works for you.
