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What should I do if I’m struggling with a monthly mortgage payment?

Missing a mortgage payment is something most homeowners would never dream of doing but often it can be taken out of their control. 

Throw an illness, family emergency or global pandemic into the mix, and paying the monthly balance can quickly become a struggle. This is especially true for those without significant savings. 

Currently, 43 per cent of homeowners are worried about making their monthly mortgage repayments, new research from insurer MetLife suggests. 

A quarter of homeowners have missed a mortgage payment, according to insurer MetLife

One in four have missed a mortgage payment due to an accident or illness at some point, while one in seven said this had happened more than once, the research added. 

I also found that almost half of respondents did not have an insurance policy that would cover their mortgage payments in such an eventuality.

With the pandemic having had a negative impact on many people’s finances, there are also more borrowers with missed payments on their record who are now looking to get a new mortgage deal.

February saw a 27 per cent spike in searches for lenders that would consider borrowers who had missed a mortgage repayment, according to the Legal & General Mortgage Club. This was based on data from its mortgage broker search tool, SmartrCriteria.

So what should you do if you think you are going to miss a mortgage payment – and how can you recover financially afterwards? This is Money asked mortgage experts for their advice. 

Borrowers at risk of arrears are advised to tell their lender at the earliest opportunity

Borrowers at risk of arrears are advised to tell their lender at the earliest opportunity 

Tell your lender as soon as possible 

If you think you’re going to miss an upcoming mortgage payment, it is wise to inform your lender straight away. 

Once you miss a payment, this is instantly marked on your credit record, which could affect your ability to remortgage in future.

Lenders are required by their regulatory bodies to offer support to borrowers going through a difficult time, and there are multiple ways they can do this. 

‘If you think you’re going to miss a mortgage payment the first thing you have to do is reach out to the lender,’ says Simon Gammon, managing partner at Knight Frank Finance. 

‘Engage at the first opportunity, because there is more flexibility on this issue than you might think.’

Depending on your circumstances and your lender’s rules, there are several options that may be available to avoid missing a payment. 

They could defer your interest payments temporarily so your monthly bill is lower, for example, or switch your mortgage to interest-only for a set period so that you are not paying off the mortgage balance.   

‘Lenders have all sorts of tools to help borrowers through a tough period,’ says Gammon. 

‘The most important thing is you don’t miss the payment because then your credit record is impacted immediately. The lender can only help you if you tell them.’

You might feel uncomfortable coming clean about your financial situation, but the worst thing to do, according to experts, is to bury your head in the sand.

‘You may feel embarrassed, but please know that you are not alone’, says Matt Coulson, director at mortgage broker Heron Financial. ‘Presently, many people are facing tricky financial challenges through no fault of their own.’

Get a mortgage holiday

As well as reducing your monthly payments, there is still a narrow window in which to apply for a mortgage holiday. 

The deadline for applying for one of the six-month payment breaks that lenders collectively agreed to offer due to Coronavirus is 31 March. In addition, the ban on repossessions will also run to the same date. 

The six-month mortgage holiday allowance can be taken at separate times. So, for example, someone who took a three-month holiday at the beginning of the pandemic and then began paying their mortgage again could apply for a further three-month holiday now.

Cancelling your direct debit without notifying your lender will affect your credit score

Cancelling your direct debit without notifying your lender will affect your credit score

If you are already in arrears, this should not affect your ability to take a payment holiday.

You need to apply formally by contacting your lender – do not just cancel your direct debit, as this will damage your credit rating.

But if you miss the 31 March deadline, your lender may still be able to offer you a payment holiday at its discretion – whether your inability to pay is due to coronavirus or another reason. 

This could be shorter than the six months offered under the coronavirus scheme, however, and will be subject to different terms and conditions based on your lender’s individual rules.  

In either case, you will need to repay the ‘holiday’ payments – either by increasing your monthly payments for the remaining term of your mortgage, or by extending the mortgage term. 

This will result in you paying more interest, so it is worth weighing up whether it is the best avenue.

‘You won’t be charged a fee for taking a mortgage payment holiday, but you may end up paying more interest in the long term,’ says Paul Coss, co-founder of broker Haysto. ‘It’s best to weigh up your options before going ahead with a holiday.’

Taking a mortgage holiday should not affect your credit score, but it will be visible to future lenders because you will have gaps in your payment history.

‘This isn’t necessarily a bad thing, but it’s worth bearing in mind that it could affect a lender’s decision in the future,’ Coss adds. 

Speak to a mortgage broker

If you want to be prepared before you head in to a conversation with your lender, speaking to a mortgage broker could help you be aware of the different options on the table and their relative merits. 

Many brokers work on commission, so this doesn’t need to incur further expense.

‘Talking through it with a broker who can guide you through the conversation with your lender will stand you in much better stead,’ says Coulson. 

‘A good adviser will ensure that you are presented with a variety of options to help you manage the situation.’

If you're struggling with repayments, speaking to a mortgage broker could help you to work out your options before you approach your lender for help

If you’re struggling with repayments, speaking to a mortgage broker could help you to work out your options before you approach your lender for help 

A year into the pandemic, brokers have now had plenty of experience finding deals for those in complicated financial situations. 

‘The wide-ranging implications of Covid-19 are continuing to play out in the mortgage market, and it’s clear that advisers are playing a critical role for borrowers,’ says Clare Beardmore, head of mortgage transformation and operations at Legal & General Mortgage Club. 

‘Not only are many focusing their efforts on finding lenders that meet the needs of those with more complex financial circumstances, including those on furlough, but they are increasingly supporting others with more affordable routes onto the ladder too.’

What happens when I miss a payment?

If you don’t manage to sort out an alternative arrangement in time, and cancel your direct debit or allow your payment to bounce due to lack of funds, your lender may make several attempts to retrieve the money. 

‘Depending on the lender, there would usually be several attempts and maybe a grace period for one missed payment – but you could be hit with a late payment fee,’ says Alex Winn, mortgage expert at broker Habito. 

Your bank or building society will also report the non-payment to the three major credit bureaus: TransUnion, Equifax and Experian. 

‘This could impact your score and therefore your ability, and the interest you pay, to borrow money in the future,’ says Winn. 

‘Unfortunately, we have had instances of customers who’ve had missed mortgage payments registered on their credit file, and as such have not been approved for their remortgage.’

If you’ve already missed a payment, it is still important that you approach your lender rather than the other way around.

‘If you’ve already missed a payment, come forward and find advice as soon as you can,’ says Coulson. ‘Lenders will be looking for logical, valid explanations as to why this has happened.’ 

Can I get a new mortgage?

It is possible to get a new mortgage after having been in arrears, though the debt will almost always need to be paid off in order for you to be accepted. 

The range of deals available to you will normally be lower, meaning you may need to pay higher interest rates.

High street banks and building societies have the strictest criteria, so depending on how serious your arrears are you may find yourself having to apply with a specialist lender.

However, there may still be deals available with major lenders. For example, Metro Bank launched a ‘near prime’ home loan for borrowers with low credit scores, missed payments and even repossessions on their record earlier this month.  

How easy it is to find a new home loan will depend on how serious your arrears were

How easy it is to find a new home loan will depend on how serious your arrears were 

The degree to which future applications will be affected depends on how many months you failed to make mortgage payments for.

Katie Brain, consumer banking expert at Defaqto, says: ‘How many payments are missed and over what period of time will decide how this affects potential mortgage deals later on.

‘Some of the main high street lenders may consider one missed payment as long as it’s not recent (for example in the last 12 months), and the last three to six months’ payments have been made.’

An easier option may be to switch rates with your current lender when the time comes to remortgage – but you will still need to have paid off the outstanding balance by that time.

‘If your credit rating has taken a hit a product transfer could also be an option, where you switch rate with your existing lender,’ says Brain. ‘However in most cases the mortgage account will still need to be up to date with no outstanding arrears.’

Having savings or insurance is the best way to protect yourself from mortgage arrears

Having savings or insurance is the best way to protect yourself from mortgage arrears

Get mortgage insurance

Ultimately, the best option to protect yourself against missed mortgage payments is to either have enough in savings to cover you for a few months, or to take out income protection insurance that will cover you if you can’t pay.

‘Despite a challenging economic outlook, 2020 saw many people turn their dream of homeownership into a reality. But, as generation rent becomes generation buy, there is an increased need for financial protection,’ says Rich Horner, head of individual protection at MetLife.

‘Some may think they’ll never need it, but ultimately not having something in place – be it a protection policy or savings – to fall back on, can add to what is already a stressful time.’

Check your credit score is up to scratch – for free

There are a number of ways to view your rating and history for free.

Experian and Equifax offer 30-day free trials of their service online, but you will need to remember to cancel before the end of the promotion to avoid subscription fees.

Checkmyfile also offers a free trial to check your reports with both Equifax and Callcredit. 

Alternatively, you can request a snapshot excluding any score by requesting a statutory credit report online or by post at a cost of £2 from each agency.

Free credit report options can also be found by visiting Credit Karma and Clearscore.  

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