If you own your home, you are likely to face mortgage difficulties at some point. How you handle those difficulties will determine whether you keep or lose your property.
Having problems in paying your mortgage is not a crime; you are not necessarily to blame for the problem.
Your ability to pay may be caused by any number of reasons including:
- Rise in interest rates
- Loss of job
- Relationship breakdown.
Your ability to successfully deal with the situation will depend not only on the steps you take going forward but also on the “rainy day plans” you made in the past.
Here are 12 of the key steps you can take to (a) prevent yourself getting into mortgage debt or (b) minimise the impact, risks and dangers if you do find yourself in that position…
1. Budget carefully
The best cure for mortgage debt is to avoid getting into mortgage debt.
An effective way to do that is to prepare a thorough and accurate household budget setting out your income and expenditure and making sure you identify and address any issues or problems at an early date.
For instance, if you are experiencing difficulties because of a fall in your income, you should take prompt steps to boost income – such as by securing a second job.
Remember that cutting non-essential expenditure is an easy and quick way to boost your income.
2. Create a mortgage reserve
It is highly desirable to have a mortgage reserve which you can turn to in the event of difficulties in meeting your full mortgage payments.
A mortgage reserve is a rainy day plan every home owner with a mortgage should have.
When devising your household budget, include an element for the reserve and place it in a savings account out of reach. Do not use the reserve for anything other than mortgage payments.
At the very least, you should look to create a reserve equal to six mortgage payments – giving you peace of mind for at least six months if for any reason you can’t pay your mortgage.
3. Seek advice fast
As soon as it looks like you are likely to go into mortgage arrears seek advice from a suitable adviser such as a money adviser, debt counsellor, financial adviser or the like.
You may also find it helpful to discuss the position with family members, friends, your employer or any person who may be sympathetic to your position and able to assist you.
The Money Advice Service (www.moneyadviceservice.org.uk) provides a wealth of information and assistance. There is a web chat service, a freephone helpline number (0800 138 7777) and contact details of various debt agencies offering free advice.
4. Make mortgage payments a priority
It is crucial not to treat mortgage debt like any other debt. It should be treated as a priority debt for the obvious reason that it could lead to you (and your family) being made homeless.
If you don’t have enough money coming in each month to pay all your liabilities, make sure that your mortgage debt is one of those that gets paid in full.
5. Speak to your lender about any arrears
If arrears become unavoidable, speak to your lender as soon as you identify a problem – ideally before you first go into arrears.
Your lender may be able to provide you with information, advice or solutions.
If possible try to negotiate with your lender a realistic arrangement for clearing your arrears. Seek advice from a debt adviser if an arrangement is not possible or you have breached an arrangement previously made.
6. Keep your arrears to the minimum
When borrowers get into mortgage difficulties there can be a tendency for them to make no payment at all, rather than paying what they can afford.
That is something you must avoid. Look to pay as much of your mortgage payment as you can, remembering that mortgage debt is priority debt.
The more you pay, the smaller your arrears, the easier it will be to make an arrangement with your lender to clear the arrears, the less likely possession proceedings will be taken against you.
7. Sort out your budget
Mortgage arrears are often a sign that your household budgeting is non-existent or has gone wrong.
If you don’t have a budget, put one together fast – seeking assistance or advice as necessary.
If you already have a budget, work out what went wrong and take remedial steps.
8. Claim any due welfare benefits
If your mortgage arrears are attributable to a fall in your income, check to see if there are any state benefits to which you are entitled.
You may be entitled to tax credits if you have children or are working but have a low income.
You may also be entitled to assistance with the interest element of your mortgage payments.
Interest only or repayment? (which of these two mortgage types is best for you?)
Are you sitting on a mortgage time bomb? (the dangers of interest only mortgages)
How to deal with mortgage debt (practical systematic ways to prevent eviction)
9. Keep to any arrangement
If you reach an arrangement with your lender to clear arrears, it is very important to keep to your agreement.
You should therefore only agree to an arrangement which you can realistically honour.
If it looks like you are going to breach your arrangement, approach your lender before the breach to see if the arrangement can be varied.
If your lender is not willing to vary your arrangement consult a debt adviser or a lawyer if you feel your lender is treating you unfairly.
10. Think twice about increasing your debt
If you are having difficulty paying your mortgage it is a high risk strategy to address the problem by further borrowing.
Taking out a larger mortgage or a second mortgage to clear arrears or give you a reserve may seem attractive; but that is only likely to work in the long term if it is a genuinely affordable option.
If your fundamental problem is a shortage of income or excessive spending, failure to address the real issue may simply store up further problems for you in the future.
Seek expert advice before increasing your borrowing as a way out of debt.
11. Consider selling your home
Selling our home is usually the very last alternative for most of us when in mortgage difficulties.
However, it may be the best alternative.
If you are in mortgage debt and can identify no affordable, realistic way out – you should not hesitate to consider “the unthinkable”.
Selling up and finding somewhere more affordable (purchased or rented) may be the best alternative in the long term – minimising your financial losses and giving you a chance to improve your financial health.
If you have to go into rented accommodation, find out whether you are entitled to housing benefit.
12. Hand in the keys
You can give up possession of your home voluntarily by handing over the keys to your lender and giving them the opportunity to sell your home without having to take costly court proceedings against you.
However that should be a last resort which you should only consider after taking expert advice – ideally from a lawyer.
Your lender will be free to pursue you for any remaining mortgage debt after selling your home.
Giving up possession voluntarily may lead your local council to conclude that you made yourself homeless intentionally – thereby losing any statutory right to be rehoused.
Have you ever experienced mortgage difficulties? If so, did you take any steps which were of particular help or assistance? Please leave your comments below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com