Struggling with the mortgage? How to avoid falling into arrears

As if last week’s interest rate rise wasn’t a big enough blow for homeowners, this week has heralded further uncertainty for anyone with a mortgage.

Forecasts the Bank of England’s base rate could rise to 6% in 2023 has put additional pressure on borrowers, already feeling the strain of the cost-of-living crisis.

Tracker mortgage borrowers will see their monthly repayments rise and anyone who is coming to the end of a deal will be exposed to the rate increases being applied to all new deals which haven’t been pulled, including fixed-rate products.

It means many households may find they are struggling to make their repayments.

We asked the team at www.onlinemortgageadvisor.co.uk what borrowers who are worried about the cost of their repayments can do to protect their home loan and avoid falling into arrears.

Here is their advice:

1. Speak to your lender

If you think you might struggle to make a mortgage payment and don’t have mortgage payment protection insurance then we’d recommend speaking to your lender immediately.

While lenders understand that unexpected events can occur, especially during a cost-of-living crisis, it’s essential that you make them aware of any changes to your financial circumstances as soon as possible.

Otherwise, if you miss a repayment without informing them, this triggers the ‘arrears’ issue instantly and a missed or late payment can stay on your credit report for at least six years. It has far less impact if you’ve agreed a missed repayment with your lender or warned them it’s happening.

So, if you can’t pay your mortgage or foresee that meeting payments will become a problem, make sure to talk to your lender first about alternative options – whether that’s extending your mortgage term, switching to an interest-only mortgage, or just altering the pay date.

Any help you may get will depend on having talked through the situation with your lender, but you should also keep in mind that these options could add to the overall cost of your mortgage.

2. Cut down your monthly repayments

You could also ask your mortgage lender if they’d be willing to cut down your monthly mortgage repayments.

This works if you can pay something towards your mortgage, but can’t pay the full contractual repayments, instead having a period of reduced payments – if your lender agrees to reduce your payments, it might help you overcome a rough patch and stop debt from snowballing.

However, before you ask for smaller monthly payments or if your lender suggests this first, we’d recommend speaking with an independent financial advisor prior to making any changes to your mortgage.

In some cases, this help comes with an exorbitant fee and it’s important to check with your lender whether there will be any charge for cutting down your monthly repayments (such as an administration charge) and how much this will be, in order for you to make an informed decision.

3. Fix your mortgage now

With market analysts expecting further rises in the base rate we’d encourage borrowers who’re seeing their mortgage repayments soar to try and lock into longer fixed-term mortgage rates for more certainty.

Those on fixed deals won’t be affected by interest rate rises, but when their fixed rate comes to an end, they’ll be subject to cost changes set by the Bank of England’s base rate or will be shifted to the lender’s standard variable rate (SVR).

The number of fixed-rate offers available have dwindled recently and some lenders are now offering virtually the same rate for two-year and five-year mortgages.

That being said, the longest deals currently have the lowest rates. So, if you have six months or less on your current mortgage it’s important to move quickly to lock in a new deal that has monthly repayments you can afford.

4. Consider mortgage insurance

There are several different types of insurance you can get to protect your mortgage. Mortgage payment protection insurance (MPPI) is the most well-known – an insurance policy that promises to make the mortgage repayments for you if you can’t work due to an accident, illness, or sometimes unemployment (only if you’re made redundant).

However, if you’re already struggling to pay or are in arrears you might not get MPPI – for instance, if you’re earning but still find it difficult to meet your monthly repayments, the insurer won’t pay out in that instance.

Alternatively, it’s worth checking your benefits because even those in work are often entitled to substantial tax credits or benefits, which could help when it comes to budgeting and keeping up with the costs of your mortgage.

While mortgage insurance can provide security during times of uncertainty, such as if you’re worried about losing your job or want to protect your payments in the event of an accident – it cannot help homeowners who’re struggling to keep up with rising monthly mortgage repayments.

That being said, having that extra protection in place to protect your mortgage in unexpected circumstances can provide peace of mind, especially when it comes to falling behind on payments and getting into arrears.

If you choose to take out mortgage insurance though, you should consider shopping around and not automatically buy from your lender as similar levels of cover can often be obtained for less than half the price through a standalone specialist.