When mortgage payment breaks end, can you pay your mortgage?

The Coronavirus mortgage payment breaks are now coming to an end. These payment holidays have been used by nearly two million people since they were intriduced near the start of lockdown in March 2020.

You can still get a first or second three-month mortgage payment break until the end of October 2020.

But after that, the Financial Conduct Authority (FCA)’s new rules about support for mortgage borrowers with Coronavirus problems say lenders do not have to give further payment holidays.

Instead lenders will have to offer “tailored support” to customers who need it. So what you are offered will depend on your situation.

How much can you pay to your mortgage?

If you can’t make the full normal mortgage payments, then the more you can pay the easier it may be to reach an arrangement with your lender.

Using a budget tool can help you see your situation more clearly and it can be shown to your lender. This tool from National Debtline helps by suggesting types of expenses you may forget about and by converting everything into monthly amounts.

When your income isn’t stable – perhaps you are waiting for benefits to be paid or don’t know how many hours work you will get each week – this can feel very rough and uncertain, but it can still be helpful.

Once you have done a budget, look at how you can improve your situation. Here are some of the options.

Prioritise your mortgage payments

Debts and bills can be divided into “priority” and “non-priority”. See What are priority debts? for details.

Your mortgage lender will expect you to pay your mortgage, other priority debts and your essential living costs first. This may mean you have little or no money for non-priority debts.

Look at making a payment arrangement with your non-priority debts.  And if that still leaves you too short to pay the mortgage, look at only making token payments or paying nothing.

This will harm your credit record, but you probably don’t have any other option. If you can pay your full mortgage amount if you only making a low payment to your credit card and overdraft say, this is what has to happen.

The good news is that non-priority creditors will generally accept that you need to do this without pushing you to pay more. If you explain you can’t afford to pay your mortgage and show them your budget sheet, they should accept your lower or token £1 a month offer.

If you aren’t sure if this is necessary or what to offer, talk to a good debt adviser.

Help through the benefits system

Make sure you are claiming all the possible benefits you can – see Turn2Us for a benefits calculator. Even if your partner still has a job or you have savings, you may still be eligible for new style Job Seekers Allowance. Your local Citizens Advice can give you advice on benefits.

It is hard and slow to get help with your mortgage from benefits.

There is a benefit called Support for Mortgage Interest (SMI). This is given as a loan, it only covers the interest part of mortgage payments, it may not cover all of those and there is a waiting period of 9 months after you start claiming benefits before you can get it…

9 months! And during that time on Universal Credit, you and your partner can’t earn anything, or the 9 month wait re-starts.

So SMI may not be of any immediate help to you, but it may be later.

Redundancy money

If you are being made redundant and you have worked for more than two years at the same firm, you may get a redundancy payout. This money can help you get through a few months but don’t delay claiming benefits you are eligible for – you need to get that 9 month SMI wait period started.

You should also be paid your notice period and for any holiday accrued. Citizens Advice can help if you aren’t sure if you are being paid the right amount.

Other sources of money

Do you have any insurance that could help? This is the time to find out exactly when mortgage protection insurance or income protection insurance may payout and how much you may get.

Other possibilities include selling an endowment policy or accessing some pension money if you are over 55. You should look at taking independent financial advice as both of these have serious long term consequences:

• cashing in an endowment may leave you unable to pay your mortgage when it ends;
• raiding your pension may result in tax and other costs now and then leave you with too little when you retire.

I can’t say if these are a good option for you – I am not a financial adviser. But it may be sensible to think of them as a last resort – it would be a mistake to turn a difficulty that may only be temporary into a long term problem. I suggest not telling your mortgage company you are thinking of doing one of these two until you have taken advice and are sure it is right for you.

What sort of help can mortgage lenders give?

Lenders should contact you before the end of your payment holiday to ask if you need further support.

The mortgage lenders may offer to:

• “capitalise” payments that you have missed. This allows you to pay back what you owe over the rest of your mortgage, with monthly payments that are larger;
• change the length of your mortgage, which will reduce the monthly payments;
• change your mortgage so it is “interest-only” for a period;
• offer another payment break or reduced payments for some months to give you time to get your finances back on track.

This is not a list for you to select what you want.  A mortgage lender does not have to offer you these options.

This may sound worrying. But the FCA is clear that it expects lenders to offer support to customers, saying:

We expect firms to be flexible and employ a full range of short and long-term forbearance options to support their customers and minimise avoidable financial distress and anxiety to customers in financial difficulty. This may include short-term arrangements where the firm allows the customer to make no or reduced payments for a specified period.

Some lenders are starting to offer interest-only mortgages as an option. A newspaper article on 17 October gave two examples:

• HSBC is offering some borrowers a 6 month period interest-only, but arrears have to be paid within a year;
• Nationwide is offering short term interest-only periods “where appropriate . . . to minimise the long-term impact on their finances”,

What help do you need?

When you have looked at what you can pay to your mortgage and how you might be able to increase this – even if it is very rough and it may change over time – you can think about what help you need from your lender.

It’s good to do this before you talk to your lender, so you know what to say. If you aren’t sure, talk to a debt adviser first.

Let’s look at some of the most likely options for different groups of people. You may not fit neatly into one of these categories. And you may be hoping your situation will get better… or be worried it will get worse. But this should give you an idea of what may happen.

“I just need to sort out the missed payments”

When you can now start making the normal monthly payments again, you just have to reach an agreement with your lender about the ones you have missed. The main options are:

• make up the missed payments over a period – the shorter this is, the less interest you will be charged;
• to capitalise the missed payments to they are repaid over the rest of the term of the mortgage
• to extend the term of your mortgage by a few months.

“Capitalising” the payments you have missed may often be the best option.  There is a calculator here that lets you see how much your monthly payment may increase if you choose to repay the missed payments over the current term of your mortgage. If you have many years left on the mortgage, this isn’t usually too much extra a month.

But if there are only a few years to go and the larger payments will be more than you can afford, tell your lender and ask to have your mortgage extended by a few months instead. Showing your lender a budget can help prove that you can’t make higher payments.

“Income has dropped so can’t make the full payments”

Here you need some time for your income to recover.  You could ask to be allowed to make reduced payments for 3 or 6 months and/or for your mortgage to be switched to interest-only for this time.

If your income does recover, then at that point it may be possible to capitalise the arrears.

“Lost job or income has fallen lot – can pay little or nothing”

If you can pay very little as you have lost your job, you may feel you have nothing positive to say to your mortgage lender.

But your mortgage lender would still prefer to hear from you. The worst thing from their point of view is for your monthly payments to stop and for you to refuse to talk to them about your situation.

Even if you can only say that you are looking for a job and applying for Universal Credit and have stopped making payments to your other debts too, that shows your lender that you are doing your best.

Your lender may be prepared to switch your mortgage to interest only. If you are still out of work in 9 months when you will qualify for SMI, this means the SMI will cover a lot more of your mortgage payments.

“This is the wrong house for me”

The main aim of debt advice is to keep people in their own homes. But is this house right for you? Is it too large or too small? Or in the wrong place for your job? Or it needs adapting for health problems? Perhaps you couldn’t afford the mortgage even before coronavirus reduced your income.

Your lender should allow you a reasonable time to sell the house if you want to do this.

What if your lender isn’t helpful?

If your mortgage lender doesn’t suggest the sort of support you would like, talk to a debt adviser about this. perhaps you could improve your situation. perhaps showing the lender a budget worked out with a debt adviser will help.

You may also be able to complain to the Financial Ombudsman if your lender doesn’t give you appropriate support. Your debt adviser will be able to discuss if you have a good case and explain how to do this.

Don’t panic about repossessions

The FCA has banned houses being repossessed for mortgage arrears until the end of October, but after that, they are again possible.

Your lender should not repossess your home if you have only missed payments during the payment holidays… not unless you “unreasonably refuse to engage” with your lender about how to repay these.

But if you had arrears before, or you now can’t resume making the normal mortgage payments, arrears will be increasing and then mortgage repossessions are possible.

This means you have to take your mortgage problems seriously, but it is not a reason to panic:

• most lenders will be slow to think about repossession if you are talking to them;
• the FCA says lenders should not repossess the property unless all other reasonable attempts to resolve the position have failed.

“Surely the government will change the rules to give more help?”

Of course, the rules could be changed in future. The FCA, who authorises lenders so they set the payment holiday and repossession rules, says:

we will keep the guidance under review and if circumstances change significantly, consideration will be given to any further measures that may be needed to support consumers during the ongoing pandemic.

And I hope the DWP is working on a plan for improving SMI – see my suggestions for how they should do this in Now is the time to reform SMI – before mortgage breaks end.

But if you will have difficulty paying your mortgage, I think you need to plan on the basis of the current rules. Don’t do nothing in the hope that further help will be provided.

Key points to remember

1. Mortgage payment breaks are ending and mortgage repossessions can restart from the end of October.
2. There is a wide variety of help a mortgage lender may be able to offer you, depending on your situation.
3. You need to prioritise paying your mortgage, even if this means paying little or nothing to your other debts.
4. Talk to your local Citizens Advice or Shelter – they can help you work out what to do and what to say to your lender.
5. Lenders will generally be slow to repossess if you talk to them about your problem and ask for help.

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