There are few financial things that can weigh so heavily on a mind than worry about paying your mortgage. But, worrying can be good for you, in that it can be the spark that ignites the fire of action.
The first thing to think about is the root cause of your worry. Broadly speaking, worry about paying your mortgage will stem from one or both of these concerns – that your mortgage payment will go up (if you are on a variable or tracker rate, or on a fixed deal coming to an end), or that something in your personal circumstances might change (such as being made redundant or losing some of your benefit entitlements). The effect of both, however, will be the same – you anticipate that you would struggle to afford, or not be able to afford, your mortgage payments.
Something to say at the outset is that worry can also be misplaced, particularly if you are not in full possession of the facts. How well do you know your mortgage? Do you know the rate you're currently paying? Is it fixed or variable? If you are on an introductory deal like a fixed rate or tracker, when does it end? Is there an early repayment charge payable if you want to switch lenders? Do you know the rate your mortgage will move to when you come to the end of an introductory deal? The answers to these questions can be easily found and could help allay your fears.
Research has found a large number of us wouldn't know how much our mortgage payment would increase by if the interest rate rose by 1%. That's not good if you are currently on a variable or tracker rate, or on a fixed rate nearing its end.
If you have a mortgage balance of £150,000, a 1% rise on your interest rate could cost you up to an extra £125 per month. If you are already struggling, that's not a welcome surprise, is it?
You'll want to start by finding out the sort of increase you could be dealing with. If the payment on your variable or tracker rate mortgage has not changed since you took it out, refer back to section 7 of your mortgage offer or key facts illustration where it will say how your payment would change if rates went up by 1%. If you haven't got this information, check your latest mortgage statement or call your lender to find out your current mortgage balance and check what rate of interest you are paying. Then do the following calculation to work out the worse case scenario:
Take your current mortgage balance X your current interest rate ÷ 12
= the approximate amount of interest per month that you are currently paying
Make a note of this figure
(E.g. You've got a mortgage of £150,000 on an interest rate of 3%. You'd be paying £4,500 per year in interest (150,000 ÷ 100 x 3), which would be £375 per month.
Your current mortgage balance X your interest rate + 1% ÷ 12
= the approximate amount of interest per month that you could pay
(E.g. Your interest rate rose to 4%, meaning you'd pay £6,000 in interest per year (150,000 ÷ 100 x 4) or £500 per month.
The answer to Step 2 minus the answer to Step 1
= The approximate amount extra you could pay each month
(E.g. £500 - £375 = £125 extra)
If you are coming to the end of your fixed or tracker rate deal, you will most likely (but not always) go onto your lender's standard variable rate. Find out what rate you are going to be paying and work out how much extra per month you could be paying – just substitute "your interest rate + 1%" with your SVR or revert rate in the above calculation.
Life has a habit of throwing change upon us, sometimes with little warning. Births, deaths, injury, illness and separation are all things we primarily think of in an emotional way, sometimes at the expense of considering the financial repercussions. But what all these events have in common is that they may affect your ability to pay your mortgage. Some can be countered with insurance, such as life insurance or income protection cover. Others can leave you in a quandary: you want to stay in your house, but you can no longer afford the payment.
You may well be entitled to benefits but not claiming them. Check out Direct Gov's website which will give you an idea if you are entitled to benefits and if so, which ones.
There are two types of worry to look at here. Either your worry is founded on something that is already happening or very likely to happen, such as your company consulting on redundancy, or your worry is about a risk that you are exposed to – "how would my family stay in the house if I died?" for instance – but there is no hint that this is likely to happen at present.
Check if you're insured. A lot of us don't even know what insurance we have in place! Dig out all of your old paperwork, particularly regarding the mortgage, and read it carefully - you may find unexpected benefits. For example, some accident, sickness and unemployment insurers might pay your mortgage for a certain period if you were to die.
Or, if your child were to become critically ill which forces you to take a break, or give up work completely, you could check your critical illness cover, as there may be children's critical illness cover included as standard.
If you can't find out from your paperwork or you don't understand something, contact your insurer or the financial adviser who sold the insurance to you.
Important! If you do have an inkling that something is amiss, such as preliminary consultations for redundancy at your firm, or you have recently been diagnosed with a condition such as cancer, it always pays to be honest with your insurer if you are trying to apply for a new policy. Some income protection policies, for example, will exclude existing conditions or decline you cover if there is a threat of redundancy (although they might cover you for other risks so long as it doesn't relate to the existing condition or risk). Similarly, life insurance may exclude your existing condition or even decline to cover you. But that doesn't mean you should be dishonest – if you were to make a claim at a later date but hadn't told the insurer of an existing condition, they may not pay out, which means those premiums would have been wasted. A good port of call if you are having trouble finding life insurance would be a charity related to your condition, as they sometimes have links with specialist insurers that might be prepared to cover you.
It's those things that we're completely unprepared for that can spell catastrophe for our finances, which is why it's so important to have suitable protection in place. A mortgage payment protection policy or income protection policy can help absorb some of the financial shock if you're unable to work. Similarly, life assurance and critical illness cover can do the same in the event of death or a debilitating condition. The key thing is to shop around for the policy that's right for you, and that doesn't necessarily mean the cheapest. Always compare the benefits of the policy first and the price second. If you are unsure what protection is best for you, employ the services of an independent financial adviser who will be able to guide you.
Whether it's your mortgage payment going up, your income going down, or a combination of the two, the net effect is the same – you're worried you won't be able to pay your mortgage. There are still more things that might help.
• Review your budget. You shouldn't treat your mortgage in isolation from all your other monthly bills. You may be able to save money elsewhere by reviewing your budget in preparation for leaner times.
• Can your existing lender offer you a new deal? Quite often your lender has products that you can switch to. If you are worried about a rate rise, or straight up can't afford your payment to go above a certain level, then a fixed rate or capped rate mortgage might be appropriate. If you're on a cheap variable deal then remortgaging to a fixed or capped rate could mean that your monthly payment goes up, but weigh that against the security you would have from knowing what your payment will be for a set period. The big advantage of remortgaging with your existing lender is that it can cut down on costs that could ensue if you remortgaged to another lender. There might be an arrangement fee to pay upfront, although you may be able to add that to your mortgage balance if you can't stump up the money.
Remember to check there isn't an early repayment charge payable if you want to remortgage. If there is, think carefully about whether the benefits would outweigh the costs. If in doubt, speak to an independent financial adviser or mortgage broker.
• Can you remortgage? Before you start missing payments or getting into difficulties, have you tried to remortgage? Providing your mortgage is small enough in relation to the value of your house, and you earn enough to be considered, there are good deals out there, particularly if you're now sitting in a lower loan-to-value band. If you can remortgage to a deal that has a more manageable or secure monthly payment it's got to be worth a try!
• Talk to your lender as soon as you can. If none of the options above are open to you, talk to your lender - they won't bite! Aside from all the regulation that says they can't treat you unfairly, your lender doesn't want to lose money either if it comes to repossession, so they will try to exhaust all avenues first. They can negotiate different solutions depending on your situation, ranging from a short payment break, to increasing the term of your mortgage.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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