How to avoid mortgage arrearsPosted on: 16 February 2010 by Mark O'haire
Read our simple steps for avoiding mortgage arrears if you feel you are about to fall into the red.
Mortgage borrowers risk going into arrears as interest rate rises set in. Long-term arrears can lead to home repossession and so borrowers are being urged to act fast if they think they are going to struggle with payments.
Here are four tips on how to avoid mortgage arrears:
Switch mortgage deal
It's the simplest and the most effective way to cut outgoings - but you need to move quickly to get the best deals. If you delay as your existing deal reaches the end of its term, you risk being moved on to your lender's standard variable rate.
A 7.94% SVR will and take monthly payments on a £180,000 mortgage up to £1,398. But switch to a an alternative at 5.99% and you will be paying £226 a month less. Best advice is to shop around for a new rate up to three months before your old deal expires.
Borrowers who delay making a switch and then struggle with their payments face extra problems. Best-buy deals tend to be reserved for those with perfect repayment histories. Borrowers who have missed even one monthly payment over the past year may be rejected and forced on to higher-rate alternatives.
'If you are struggling with your finances you should always make your mortgage a priority and get on to a low rate fast. Getting a bad payment record limits your options,' says Vivienne Starkey of independent financial adviser Equal Partners in London.
Switching from repayment to interest-only terms brings the monthly bill on a typical £180,000 mortgage down from £1,173 to £898. Going interest-only is a common strategy for borrowers who need short-term help paying their bills.
Lenders can change payment schedules on to interest-only terms at any time, even in the middle of a special rate deal. There are rarely any fees charged for the new calculations.
But experts warn of long-term repercussions. 'Your outstanding debt will still have to be repaid one day, so you shouldn't get used to lower payments unless you are sure you can save enough to clear the debt,' says Starkey.
Extend your term
This can give modest relief on monthly bills while retaining the security of a traditional repayment mortgage. Most repayment loans are structured on 25-year terms. A little capital is repaid alongside the interest each month to chip away at the debt. Extending the term reduces the amount of capital and can make rising interest rates more manageable.
Ask your lender to add five years to a traditional term on a £180,000 loan and your payments fall by about £85 a month. Go for another five years and your outgoings fall a further £55 a month.
Most lenders are now flexible and will let loans last up to and even beyond the standard retirement age. There may be a nominal charge but the new calculations can normally be arranged at any time. The downside is that your overall bill will be much higher once the extra years of interest are taken into account.
Is insurance the best policy?
Most banks and building societies offer insurance to nervous borrowers who are worried about falling into arrears and risking having their homes repossessed. But experts warn customers to check the small print.
So-called 'mortgage payment protection insurance' is complicated and controversial. Policies promise to pay out up to a set amount each month if holders are too ill or injured to work.
Customers who are in full-time employment when they take out policies should be able to make claims if they are made redundant as well, though self-employed people can't claim.
Payments tend to be for a maximum of two years, though many policies stop paying after 12 months. Premiums also vary.
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