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Mortgages: What happens if I am struggling to pay?

The average interest rate charged by mortgage lenders is now higher than at any time in the last 15 years.

So what can those struggling to make repayments do – and what support should they get from their provider?

How have tracker, variable and fixed mortgages changed?
There are different types of mortgages – all of which have become more expensive in recent months.

Tracker rates rise and fall in line with the benchmark interest rate the Bank of England sets eight times a year. It rose to 5% in June
Standard variable rates (SVRs) change at the discretion of the lender – a decision influenced by the Bank of England’s rate but not directly linked
Fixed rates, held by about three-quarters of mortgage customers, are set for a certain number of years – usually two or five – after which borrowers remortgage, or are automatically moved to an SVR
Mortgage rates have risen, and the 1.6 million people on tracker or variable deals are paying much more than a year ago.

Nearly 2.5 million homeowners have fixed deals that will expire by the end of 2024, and face a significant increase in monthly payments.

What next for mortgage rates?
It is hard to say. The sector has seen considerable upheaval in the past year, after many years of ultra-low rates.

The typical interest charged on fixed rates for new borrowers shot up after last autumn’s mini-budget, then calmed somewhat, but has now risen to a 15-year high.

That’s because wages and prices are rising faster and for longer than expected, and meaning the Bank of England may raise the base rate to 6%.

The Bank has warned that more than two million households will pay between £200 and £499 more a month on new deals from the end of this year and the end of 2026.

A further one million mortgage holders will see their monthly payments rise by at least £500 over the next two and a half years.

If the base rate does rise again, anyone on tracker deals will also face higher repayments.

House prices have also started to fall as higher interest rates put off buyers.

The government’s official forecaster, the Office for Budget Responsibility, suggests that UK house prices will fall by 10% by 2024 compared with last year’s peak.

Will it be hard to get a new mortgage?
There are still likely to be plenty of options, depending on your circumstances. The bigger question is whether people can afford higher repayments.

An agreement between lenders, the Treasury and regulators means people can switch to a new fixed-rate mortgage without a new affordability test when their current deal ends, as long as their payments are up-to-date.

Interest rates fluctuate based on the Bank of England’s base rate and market conditions.

How can I save money when renewing my mortgage?
If you have savings, you could consider paying down some of the total amount borrowed.

Savings could also be put into a linked offset savings account, where you only pay interest on the mortgage balance, minus the amount you’ve saved.

You may want to extend the length of the mortgage term, although that would mean paying more in total.

A broker can guide you through the different options.

What happens if I miss a mortgage payment?
Owing two or more months’ repayments means you are officially in arrears.

But the Financial Conduct Authority (FCA), which regulates mortgage firms, says lenders must treat customers fairly.

It says borrowers must contact their lender as soon as they realise they will struggle to make repayments – the earlier the better. Trained and experienced staff must offer help.

What do lenders have to do?
Within 15 working days of falling into arrears, your lender must:

list the missed payments
explain how much is outstanding on the mortgage
outline any charges
Your lender must consider any reasonable request to resolve the arrears. This could include reducing your monthly payment by extending the term of the mortgage, or switching to an interest-only payment for a certain period.

Missing monthly payments – or arranging to pay less than you owe – will be reflected on your credit file, which could affect your ability to borrow money in the future.

Can I take a mortgage holiday?
A mortgage payment holiday lets borrowers delay repayments for a short time.

Lenders may offer this option, depending on individual circumstances, although probably not to those already in arrears.

The level of support offered to customers during the Covid pandemic has been reduced.

Again, a payment holiday will show on your credit file.

Could I lose my home?
Some people may decide to sell their home and – in extreme circumstances – the lender could take court action to repossess it.

Repossessions are far rarer than they used to be.

There are several stages before a lender can do this, and the whole process takes about two years.

But if you think your home is at risk, it is well worth getting free, independent debt advice about your options.

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