More than 770,000 homeowners have missed a mortgage payment in the past 12 months, according to the Citizens Advice Bureaux.
Repossessions are also at their highest for five years with 8,140 homes being repossessed in the first half of 2006 compared with 4,620 for the same period last year, says the Council of Mortgage Lenders (CML). While these figures only represent a fraction of the mortgage market, they still make sober reading.
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People are most likely to fall behind with their mortgage payments when they suffer a relationship break-up, lose their job or their income is reduced as a result of ill health or less overtime.
While you may not be able to prevent these things from happening, you can take steps to reduce the chance of falling behind with your mortgage. First, make sure you do not borrow more than you can afford.
As well as the mortgage, you are going to have to pay council tax, utility bills and insurance. You also need to consider how you will manage in the future, says Christopher Dean, spokesperson for the CML.
You may be tempted to get the biggest mortgage you can, but you need to ensure that if interest rates rise or your circumstances change – for instance you start a family – you can still pay your mortgage, he says.
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Financial experts recommend having a contingency fund with at least three months worth of salary in to cover short-term emergencies.
A good way to build up a financial buffer is to make overpayments on your mortgage when you can and then if you run into difficulties later you can draw on this money. Many lenders allow overpayments, but check that there are no charges for doing this and that the money can be made available later if you need it.
If you are on a tight budget, consider a fixed-rate mortgage. This way you are not affected by changes in interest rates and always know how much your repayments will be.
Consider insurance
State benefits do not normally cover mortgage payments during the first nine months you are out of work. So it is worth considering mortgage payment protection insurance (MPPI).
This pays out a set amount if you are made redundant, or unable to work due to accident or sickness. Some policies do not cover the first 60 days of unemployment and payments may only be for one year. Self-employed people working on fixed-term contracts and those with a pre-existing medical condition should check the small print to ensure a particular policy is suitable for them.
Most lenders offer this insurance when you take out your mortgage, but it is usually cheaper to buy direct from companies such as British Insurance and Paymentcare
How to avoid a crisis
Speak to your lender as soon as you have problems, says Rosemary Calender, spokesperson for Nationwide Building Society.
Lenders are happy to talk and help come up with solutions. Repossession is the last resort and lenders do not want to go down this route. Its always best to speak to someone face-to-face because its more relaxed and easier to look at the options and at any paperwork. We can help people look at ways to increase their income, such as by taking in a lodger, reducing their outgoings or restructuring their loans to an affordable amount each month, she says.
What you should never do is ignore the problem. Not only will your lender look less sympathetically upon you, but you could put your home at risk. Your mortgage is secured against your home, so if you repeatedly miss mortgage payments your lender could apply for a court order to repossess your home. This is rare, but if your home is repossessed you will have difficulty borrowing money again and your name will stay on a central register of defaulters for six years.
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What to do if disaster strikes
The first thing to do is check if you are entitled to any cash from a relevant insurance policy. This could be MPPI, or if you have had to give up work through ill health it could be critical illness or permanent health insurance.
If you are going to have problems paying your mortgage, speak to your lender to discuss your options. If the problem is likely to be short-term – if perhaps you overspent on house improvements or suffered a bereavement and need a few months to get your finances sorted out – then a mortgage payment holiday may be the answer.
Another option may be to convert to an interest-only mortgage for a limited time. This can reduce your monthly payments by around 30 per cent. But at some point you need to make arrangements to pay off the capital, perhaps switching to a repayment mortgage or setting up an investment to pay off the capital.
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Another way to get down monthly payments is to increase the term of your mortgage. Over the long term this makes your mortgage more expensive as you will have to pay more in interest. And older borrowers need to ensure they can make repayments if they extend the mortgage term into their retirement. But once you get back on top of your finances, you may well be able to reduce the mortgage term.
If your problems are of a more long-term nature – perhaps you have split up with your partner – then you need to discuss with your lender if you are going to be able to keep up the mortgage. You may be able to negotiate lower repayments while you sort out the situation or put the house up for sale.
If you dont want to speak to your lender direct, contact your local Citizens Advice Bureau (CAB) for help. Peter Sutton, social policy officer at CAB, says people who fall behind with their mortgage payments often have other debts too, so the sooner they get help the better.
Generally, we advise people to ensure they pay their mortgage rather than paying off unsecured debts like credit cards or
personal loans. But trying to juggle payments between creditors can be very difficult, and CAB advisers often see people who have tried their best to manage repayments by robbing Peter to pay Paul. Often this strategy just leads to bigger debts, he warns.
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