Worried about mortgage arrears? This is what you need to do

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Fearful of interest rate rises, the City watchdog has demanded mortgage lenders be more proactive in identifying borrowers who may fall into arrears but there are steps you can take to manage a rise in payments.

In a review into how lenders deal with those in arrears, the Financial Conduct Authority (FCA) has warned that households may not be able to cope with increased mortgage payments when interest rates begin to rise from their historic low of 0.5%. The Bank of England has indicated that rates will begin to rise next year, although the pace of increases will be slow.
"Despite an extended period of low bank base rates, household debt-to-income remains high and unsustainable levels of debt remain a key driver of financial distress for UK borrowers. This and the possibility of further debt accumulation leaves some households exposed to potential interest rate increases, income and expenditure shocks and changes to credit conditions," said the regulator.

Ray Boulger of independent mortgage broker John Charcol said lenders were under pressure to accommodate those struggling with their mortgage repayments but borrowers could help themselves with some forward planning.

He said those who were worried about their financial situation should lock into a low, more manageable mortgage rate now.

"People without much equity will only be able to switch to a worse rate [when interest and mortgage rates increase] but people with 10% equity can still get a rate under 4% now," he said.

"Make sure you switch to a fixed rate for a decent amount of time, like five years, there is no use switching to a two year fix as rates will be higher when it ends. With a five year mortgage you get five years of protection."

If your financial situation worsens with no chance of improving, Boulger said it is worth considering selling your home or downsizing now, but warned that early repayment charges had to be considered.

"You have to ask yourself if your situation will improve as rates get higher, or do you see a reason to sell," he said. "At the moment selling is pretty easy so do not rush into selling too soon because property prices will rise for another year or maybe two."

If you do not have to sell your home straightaway because you can continue paying the mortgage, even by the skin of your teeth, then you could benefit from a better mortgage rate later on as you will have paid off more of your loan and if prices have risen, you will have more equity in the property.

Lenders are able to defer mortgage payments but Boulger said it is better to tackle the problem before it gets to this stage, and as interest rates increase it is more expensive to defer payments for the borrower and lender.

"Lenders will say contact us if you have difficult but for those with a broker it is better to contact them first because the lenders' advice will be what is right for the lender," he said. "A broker will look at it from your perspective, they may say sell but they may be able to help you remortgage.

"The advice may be talk to your lender if it is the only option because you have already incurred arrears. Recognise you have a problem [earlier] and you have a head-start."

Those who fall into financial hardship and can't pay their mortgage should not rely on the government to support them. If you are forced to take benefits, for example if you lose your home, you may qualify for 'support for mortgage interest' (SMI) where the government helps to pay the interest on your mortgage up to a loan maximum of £200,000.

The money is recouped from the claimants when the house is sold but helps to prevent a fire-sale of the property.

The government is planning to charge 8% interest on any SMI claimed, reducing the amount the homeowner and the lender receive from the sale.

Simon Burgess of mortgage insurer British Money said the government's plan was 'daylight robbery'.
"I've received information suggesting homeowners who struggle to pay their mortgage will soon have to pay back more than the amount of benefits they received in the first place," he said. "Mortgage are now available at 3% so how can the [government] justify a rate which is nearly three times higher?"

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