If the April showers aren’t dampening your spirits, the shock of rising bills certainly will do. Regular readers will know that this year we have now reached ‘Awful April’, where prices are rocketing across almost every sector.
Of all the rising bills, the one subject I get asked about the most is mortgages. From people concerned about mortgage debt and affordability to the prospect of remortgaging during the highest interest period in recent memory, I’m often asked for my thoughts on what to do and what the future might hold by friends, family and strangers.
We are right to be concerned. According to the latest figures from UK Finance, over 75,000 people were in mortgage arrears in the last three months, while over 6,000 buy-to-let mortgage holders were in the same boat. In fact, these figures have remained consistently around the combined 80,000 level for a few years now. However, as inflation is pushing people closer and close to the point where they simply can’t afford their home, many experts – myself included – are expecting to see millions of households struggling to pay their mortgage. In fact, the Centre for Homelessness Impact research revealed half of all people with mortgages are concerned about being able to pay their mortgages in the year ahead.
There are a few bits of good news. It’s just been announced that the Support for Mortgage Interest (SMI) scheme has been extended, but not to all the people who really need it.
Seeing as mortgage payments are a major concern, I’ve rounded up top property experts Jonathan Rolande and Jane King to cover your options.
Why should we help people struggling with mortgages?
Put simply, allowing people to go under when their debts get too much is a false economy. Lenders lose out by selling on properties at auction at a loss, which makes borrowing more costly for everyone. But it’s more expensive to society as a whole to let people collapse in to debt, as the support required – from homelessness to benefits – is pricier that helping people through a difficult period.
Of course, if you can’t afford your home, then you have to make some hard decisions. It may be that you have to downsize, for example. But that’s better than losing your property.
The problem comes when people teeter on the brink before a house sale can go through. I’d argue that this is where support needs to be targeted. On top of this, countless people are in financial difficulties but don’t (yet) qualify for benefits. Hundreds of thousands of people are ‘asset rich, cash poor’ meaning they may have a nice home and car, but they can’t afford them. Focussing support solely on benefits ignores the surprisingly wide demographics of those who might end up on benefits if they don’t get a short-term breather to sort out their finances.
Finally, denial isn’t a river in Egypt, as the saying goes. When it comes to property, make people refuse to accept point-blank that they might lose everything if they don’t act. I’ve spoken to hundreds of people over the years who outright reject the possibility they could lose their homes (they usually did). Others cling to ridiculous internet urban myths about mortgages ‘not being enforceable’ under certain circumstances. There has never been a situation where people have got out of paying their mortgages due to any of this foolishness.
What is the Support for Mortgage Interest Loan?
Back in the Autumn Statement last year (not the notorious disastrous budget), Jeremy Hunt announced the announced that the Department of Work and Pensions (DWP) would be offering help to struggling households who received certain benefits. However, the SMI only kicks in after nine months of claiming. This has now been cut to three months and is automatic.
The support is actually a loan (paid to the lender) that helps cover interest payments on mortgages or home repair loans up to £200,000 of what you borrowed. And yes, you’ll pay interest on that. This is currently calculated at 2.09% though the percentage you’ll pay rises and falls with inflation).
This is all well and good, but as I mentioned, what about the people who are not on benefits but might go under? The Government need to come up with plans to get people through the next tricky few months – and I’d like to see an embargo on repossessions for at least six months too.
What can I do if I can’t pay my mortgage?
As Jane tells me, the options are depressingly limited. So the most important thing you can do is speak up and contact your lender as soon as you know you are in trouble. For new borrowers, if you can afford to get on to the ladder, be aware that while you can get insurance policies to cover long-term sickness, redundancy cover is becoming increasingly elusive.
Jonathan and I have put our heads together to come up with some possible options for you if you are struggling or worried about paying the mortgage.
Make a budget
All lenders are required to have measures in place to support people struggling to make their monthly payments. But in order for them to work out the most suitable arrangement, you’ll need to tell them all about your circumstances. So make a budget, covering all of your main incomings and outgoings. Don’t forget things like food and transport. This will also help you identify where you can save some cash by cancelling regular payments you might have forgotten about.
Your mortgage lender doesn’t want you to go under, but that doesn’t mean you’ll get help or support for an unspecified amount of time. So have a pragmatic think about what the next few months might hold in terms of your job and any significant life changes. You’ll need to explain these to the lender.
If you’re worried about saying the wrong thing, then speak to an organisation like Citizens Advice, or charities like Shelter. They have tons of useful guides and information on their websites too. If your situation isn’t dire, then consider chatting to a mortgage broker or financial adviser for an assessment of your options. This will cost you a fee – but it’s worth it for practical advice and peace of mind.
Pay what you can
It’s human nature that when faced with a desolate set of circumstances to just give up. But don’t stop paying. In fact, pay as much as you can afford each month. This shows intent and a willingness to meet your contractual obligations. The mortgage lender will notice any reduced payments and contact you – but don’t wait for them to do this.
The interest-only option
An interest-only mortgage does exactly what the name suggests. You pay the interest on the mortgage but not the underlying cost of the property itself. This leaves you with a big problem though – you will not end up owning the property unless you have an alternative way of paying off the debt. However, if this is a temporary option, then mortgage lenders may allow you to switch to an interest-only deal temporarily.
Extending your term
Extending the term of your mortgage may be an option with some lenders. Your payments will reduce, but bear in mind the interest you pay will ultimately be higher. You may also face challenges if the new term takes you past what your lender thinks your retirement age will be. Be prepared to answer these questions.
The nuclear options
If none of these options work and the debts are piling up, then you could ask your lender if the option of ‘capitalising the arrears’ is on the table. In some circumstances, your lender could agree to add your arrears to the amount you owe on your mortgage. Inevitably, payments will increase when this happens, so this may only be possible with an extended term. Alternatively, you can always consider downsizing – selling your property and moving to a cheaper one. This takes time though, so speak to the lender about the transitional period while this takes place.
As Jonathan says, you can get creative too. Why not consider a lodger? After the recent flight to the grassy and spacious rural areas, people are now being forced back in to the cities a few days a week for work, which means you might only have to rent a room a few days a week. Overseas students are often looking for similar short-term arrangements. And if that garage isn’t doing anything you might be surprised to find how much renting it can bring in.
What the future holds
After over a decade of economists and experts being utterly befuddled by the twists and turns of the housing market, it’s almost impossible to say what the future holds definitively. However, realistically, we are going to see more properties being repossessed as people struggle. The long-term effects of the cost-of-living crisis will have an impact too. So even if inflation beginning to drop by July, the impact of stagnant wages and other expenses like runaway food costs will continue to contribute to this.
In terms of the wider market, Jonathan tells me: “Homeowners can expect to see an average drop of 2% or 3% by the end of 2023. Interest rates are now very likely to be at their highest level although a reduction in the base rate is unlikely this year. The good news is that longer-term, fixed-rate loans have become cheaper since their peak in late 2022”.
“The market for buyers is still competitive but the buying frenzy is now behind us. With Help2Buy now over, there may well be good value to be had in the new-build market as developers compete harder for sales”.
In my view, the long-predicted demise of the housing market doesn’t seem likely this year. However, there is a huge crisis in terms of affordability and getting on the housing ladder which is effectively creating a two-tier society where home ownership is only possible for existing home owners or people who are lent the money for a deposit. This is deeply unfair and needs to be addressed. Watch this space…
Featured in Times Money Mentor – Martyn James