If you have taken out a property loan in order to help you purchase your home; most commonly through the form of getting a mortgage, you will be aware that you will have to make monthly repayments each month to repay the debt over time. However, what happens if something prevents you from making these payments, such as an accident which means you can no longer work, or another kind of emergency which decreases the amount of income you receive?
This is a very important consideration as missing or failing to make payments due could result in legal action and in the most extreme of circumstances, losing your home. Having to repay a property loan is also important in the case of an investment property loan, for example auction or bridging finance. It you are unable to repay a property loan however, one of the most important things to do is to inform the lender who may be able to assist you.
What Are Property Arrears?
If you are 'in arrears' in relation to property finance, it means that you have mortgage payments that are now overdue as you have missed previous instalments and have not informed your mortgage lender directly. Worryingly, this will usually start the clock on property repossession. This is fundamentally why if you know that you will be unable to pay your mortgage on a particular month, you should tell your lender as soon as possible in order to avoid the situation potentially spiralling out of control.
If you have Mortgage Payment Protection Insurance (MPPI) it is worth using it if you are in arrears. This kind of insurance means that in the event of sickness, an accident, or unemployment your insurer will cover the cost of monthly mortgage payments if you reasonably cannot repay what you owe. Generally speaking, MPPI policies will last for up to two years and the maximum payment they will make for each month is usually around £2,000.
Many industry experts recommend that you claim MPPI (if you have taken it out) prior to asking for government help, as aid received through government funding will usually only cover the cost of interest in the form of the Support for Mortgage Interest scheme.
Support for Mortgage Interest Scheme
If you are struggling to make mortgage repayments it may be worth finding out if you are eligible for the Support for Mortgage Interest scheme. This government funded scheme makes interest payments on your outstanding mortgage if you are no longer able to pay for it (this is only the first £200,000 of the mortgage.) It has recently been changed however, from a benefit into a loan, so you will have to pay SMI money you have received when you sell the house or pass the ownership on too.
The interest rate is dictated by the Bank of England and fluctuates according to whether their average mortgage rate goes up or down. It is important to note that you will not be able to claim for SMI if you have more than £16,000 in savings, or if you are the owner of another property.
Mortgage Rescue Scheme
If you live in Scotland or Wales, there exists other government funded schemes that help homeowners who are having difficulty paying back their property loan. The Mortgage Rescue scheme is aimed at helping those in danger of losing their home. The Mortgage to Shared Equity scheme (which falls under Mortgage Rescue) is generally for people those who:
- Have a current loan to-value for their mortgage which is less than 80%
- Have been unable to reach a settlement with their lender
- Have been in arrears for at least three months
- Do not have more than £2,000 in savings
Under this scheme, those who fit the above requirements can sell up to 30% of the property to the Scottish government, which can then be bought back at a later stage when you are back on your feet.
If you are unable to receive government funding, and do not have savings or MPPI, then repossession may be something that you need to consider. Repossession occurs when you are unable to make property loan repayments to the lender. As part of the loan agreement, the lending company is able to take your home as collateral should you default. This usually happens by going to court first before the house is then repossessed. Usually, the house will then be put to auction to get the quickest sale possible for the lender to recover their cash.
How Can I Avoid A Repossession Order?
- Communicate with your lender - Most banks will not file for repossession if a settlement is in the middle of being negotiated. Talk to your lender about alternative options, such as switching to interest-only, or asking to extend the mortgage term in order to reduce the cost of repayments each month. In addition, if you are eligible for one of the government funded schemes, they will usually not provide help until you have shown you have talked through your situation with the mortgage lender in question and tried to come to an agreement on settling missed and outstanding repayments
- Consult debt charities - Contact agencies such as Citizens Advice or National Debtline, who can provide advice as to how you can manage and prioritise your existing debts
- Suggest a smaller payment - It is well advised to suggest to your lender a smaller monthly payment instead of offering nothing at all. It is also worth asking them if you can move the date to a later period in the month