Nobody takes out a mortgage expecting to fall into arrears one day, or to have their home repossessed. But life has a nasty habit of getting in the way of the best laid plans and last year 36,000 homes were taken into possession by mortgage lenders.
What's even more surprising is the fact that this is the lowest number of repossessions in four years, according to the Council of Mortgage Lenders (CML). Indeed the figures, released yesterday, were widely seen as encouraging!
The number of people who fell behind on their homeloan also dropped in 2011 compared to 2010, but there were still a massive 159,400 mortgage accounts in arrears. That represents a lot of worried families up and down the country.
Although things got a little better for mortgage holders last year, the future doesn't look too rosy. In fact the CML has predicted that arrears and repossessions will rocket in 2012 as a result of rising unemployment and increases in the cost of living. It reckons that a massive 45,000 homes will be repossessed this year and 180,000 mortgages will be in significant arrears.
So what actions can you take to avoid falling into arrears or, if that's not possible, get out of them quickly?
Prevention not cure
1 Overpay now
This may not sound like a great option if you have money worries, but if you are concerned about your future ability to repay your mortgage, it is well worth putting any spare cash you currently have into reducing your debt. Lenders look very kindly on borrowers who have overpaid their mortgage in the good times because it effectively puts you ahead of schedule on repaying your homeloan and this gives you more leeway if times get tough.
2. Borrow cautiously
When you take out a mortgage in the first place borrow well within your means, thinking carefully about how you would cope if you lost your job or had a change in circumstances that affected your finances (such as a new child). If you borrow modestly you are more likely to be able to cope with changes in your income than if you have overstretched to get on the property ladder.
3. Fix your rate
A long-term fixed rate mortgage will protect you from interest rate increases over the agreed fixed period, meaning you know exactly what you will pay each and every month. At the moment long-term fixes are extremely competitive, but with the Bank of England Base Rate at its historic low of 0.5% there are cheaper variable rates available. Some borrowers may prefer to bag a lower rate and overpay any surplus money each month. There is no right answer, but remember that a fix is the only way to guarantee your payments will not change for a set period.
4. Take cover
You could consider Mortgage Payment Protection Insurance. It is pretty cheap (from around £4 per £100 covered) and will pay your mortgage for 12 or 24 months if you are unable to work because of accident, sickness or unemployment. This could prove invaluable, tiding you over until you are able to work again.
Already got a problem?
1. Talk to your lender
If you are genuinely concerned that you won't meet your future mortgage payments, talk to your lender now. Always pay whatever you can afford even if it isn't the full amount owing, and get in touch before the payment is due to discuss your problem. Lenders want borrowers to do this because it allows them to work with you to come up with a possible repayment plan that suits both of you. And they are far more likely to offer you a workable solution if you get in touch with them early.
2. Stick to your new plan
If your lender agrees a temporary repayment plan, stick to it. For example they may reduce your payments until you get back on track, or even give you a short payment holiday. Alternatively they may switch your mortgage to an interest-only deal for a short time, which will mean cheaper monthly repayments, but could extend your mortgage term. Either way, only agree to a plan that you will be able to afford and then make sure you commit to it.
3. Look at your other commitments
If you have other expensive financial commitments, like loan or credit card repayments, you need to assess your whole financial situation. This means looking carefully at your income and outgoings and cutting back where you can. If there still isn't enough money you may need to prioritise your debts and it could be worth seeking independent advice.
4. Get free advice
Debt advice is extremely important as the experts can help you to negotiate with your creditors to reduce your payments or even consolidate your debts into one affordable loan. They can also help you to access State support. It is very important to be aware that you do not need to pay a private company for debt advice, although many advertise their services. Free independent debt advice is available from various sources including Citizens Advice, The Consumer Credit Counselling Service, Shelter, Payplan, and The Financial Services Authority. Finally the Government's own website has some really useful information on what to do if you can't pay your mortgage, under Mortgages and repossessions.