House Doctor: 'We're about to miss a payment on our mortgage. What can we do?'
Friday 15 April 2011
Question: We've twice come close to defaulting on our monthly mortgage payment, but managed to scrape by each time. Yet I'm sadly convinced it won't be long before we succumb, as our finances are spread very thin. Is a second mortgage extension (it has already been lengthened to 32 years after an earlier remortgage) or payment holiday a viable way to grab a short-term breather? JM, Gwent
Answer: Be under no illusion – a default will be a huge shock to your lender, most likely prompting a telephone call within days to ask for an explanation. Worse, it will wreak havoc on your credit record (missed mortgage payments will stay visible for other lenders to see for six years), is viewed as a flashing warning sign of poor creditworthiness and will result in a fee of anywhere between £25 and £50. "This kind of situation requires you to work closely with your bank and be utterly honest about what's going on in your personal finances," says Andy Montlake at mortgage broker, Coreco. "Don't ignore payment notices, phone calls or any legal correspondence, since it'll only make matters worse. As a rule, banks won't be sympathetic to owners who don't make a proper effort to sort out their affairs."
Since you haven't actually defaulted, your best bet is to call your lender as soon as possible to put them in the picture, says Melanie Bien at broker Private Finance.
Many lenders are engaged in what is known as "forbearance". This Government-approved policy demands lenders exercise patience with struggling mortgage borrowers and is designed to prevent high numbers of repossessions. It lets borrowers take a breather, typically via either an extension to their loan, a switch to cheaper "interest-only" mortgage payments, or a payment holiday on interest payments.
These carry penalties – take a payment holiday and you'll have to eventually pay back the skipped mortgage sums as well as extra interest, while a switch to interest-only will mean hefty future overpayment to put you back on track.
It will be stressful, but you're definitely not alone in your struggle.
Recent figures from the Financial Services Authority regulator underlined that, for every British mortgage borrower in arrears, two are working with their lender in forbearance to avoid debt defaults.
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