If you don’t handle it right, your mortgage can kill you – metaphorically of course. It can leave you in debt, homeless and in tears. Having a mortgage reserve can be a real life saver when it comes to neutralising the dangers of a mortgage.
It is prudent to have a mortgage reserve fund for any and every property you own, whether it is your home or an investment property rented out to tenants.
REASON FOR RESERVES
A property is such a valuable asset it is common sense that you should have strong measures in place to prevent it from being lost.
When you own a property subject to a mortgage, it is not truly your property until you pay off the entire mortgage debt.
Up to that point, payment default can lead to your lender repossessing your property and evicting you.
Because your financial circumstances can deteriorate for any number of reasons – including loss of job, ill health or relationship breakdown – it is essential to have money in reserve to meet your monthly mortgage instalments if your regular income or earnings are reduced or stopped.
THE RESERVE FUND
You should aim to create a reserve fund as large as possible but certainly one large enough to pay at least 6 mortgage instalments… as well as your usual monthly household expenses.
You should operate on the basis that your reserve will be topped up within a month if you draw on it.
If you are unable to top up your reserve, you should not sit on your hands and allow it to run down.
Instead you should promptly seek personal, money, financial, debt or legal advice with a view to resolving your money issues.
How to deal with mortgage debt (practical systematic ways to prevent eviction)
The importance of savings (the reasons for always having money in reserve)
Keeping the roof over your head (12 ways to deal with mortgage arrears)
BENEFITS OF A RESERVE FUND
The main benefit of a reserve fund is that it gives you breathing space to address financial issues impacting on your ability to pay your mortgage.
If it is a question of seeking new or additional employment, or raising funds, reserves capable of lasting at least 6 months will give you a reasonable amount of time to sort things out.
Once you go two months in arrears, a lender may be able to treat you as being in default of your mortgage agreement and can become quite pushy, harsh or unsympathetic.
You can avoid defaulting by drawing on your reserves where necessary.
Avoiding missed or late mortgage payments will prevent you from damaging your credit score – and your ability to borrow will not be compromised if you need a loan to get you out of your money difficulties
PERILS OF BEING WITHOUT RESERVES
If you fall into mortgage difficulties and don’t hold enough in reserve to maintain your payments, you put yourself at the mercy of your lender.
Their initial response is likely to be helpful, bound as they are by a code of conduct and rules of court which make court proceedings a last resort.
However if you lack the money to pay your instalments, court proceedings will eventually be taken. Around 20,000 possession claims are brought each year with about half of the total leading to eviction.
Current possession claims are a small proportion of what they were following the 2008 credit crisis.
A “disorderly Brexit”, which seems increasingly likely at the moment, followed by a tightening of credit and higher interest rates, could escalate greatly the number of borrowers at risk of possession claims.
You can lower your vulnerability by putting together the biggest mortgage reserve you can, taking account of all the mortgages you have.
Do you have a mortgage reserve? If you don’t, are you taking steps to create one – and how challenging are you finding it? Please leave your comments, observations or questions below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com