Working your way out from beneath a mountain of mortgage debt is not something any of us ever want to have to do, but, unfortunately, with the economy in a perpetually fluctuating state and more expenses constantly stacking up for most of us, it could and does happen. It doesn’t have to be a catastrophe, though, as long as you are capable of clearing your debt in an expedient manner. Here, we’ll take you through the process in simple terms that should keep the wolves (or, in this case the bailiffs) from the door!
Dealing with your Mortgage Debt
If you have been struggling to maintain the regular mortgage payments as originally agreed by yourselves and your mortgage lender, then you might have fallen into debt, or what is known as mortgage arrears. Whether you have simply been paying less than agreed or have fallen behind completely, you’re going to need to find a way of paying back what you owe and clearing your debt, otherwise your lender could file a court action for a repossession order and you might end up being evicted from your own home! Below, we’ll take you through a few of the most common ways in which people who have fallen into mortgage debt clear it and keep payments regular so they don’t fall into the same trap again. Take note, however, that with the options listed below, you’ll need to discuss them with your lender before reaching a decision.
Make a Plan
As with all other types of debt, start by making a plan to repay your mortgage debts as quickly as you can afford. Each time you get an increase in income (even if it is just short term) consider applying it to your debts.
Sell Sell Sell
If you have a fair amount of material possessions that you can live without, you might want to consider selling off everything you can to pay off your mortgage debt in one fell swoop. Whether you can do this or not will obviously depend on the severity of your debt and the value of your possessions, but it is certainly possible in certain situations.
Making Extra Payments
Perhaps the most common way to pay back your debt with minimal fuss is to simply pay back a little more on your mortgage every month until the debt is cleared and then go back to paying your standard, monthly amount. To work out how much you can logistically afford, work out exactly how much is coming into your household every month and how much you need to pay your household bills and expenses (as well as other living costs like food). With this household budget worked out, you’ll be able to ascertain exactly how much you can afford to pay extra on your mortgage every month, and will be able to work out how long it will take to pay off your debt this way. Put this in a formal letter and send it to your mortgage lender and see if they agree to your terms.
Re-Evaluate Your Budget
This might sound obvious, but honestly, more often than not simply analysing your budget and making small changes here and there can often make all the difference. Simply make a list of all the money you have coming in and going out (including other debts) on a monthly basis and see where you can cut corners or bring in a little more money. Consider cutting anything that isn’t 100% necessary (at least until you clear your debt) and dialling back on certain other expenses. This could involve anything from the brands of the groceries you buy to cutting down on nights out or changing your TV or broadband packages. You could also make sure you reduce utility costs by using less water, gas and electricity. As far as money coming in is concerned, you could start by checking if you can claim any benefits or tax credits and hit up every price comparison site you can to make sure you are paying the minimum possible amount on insurance. Finally, consider renting out a room in your home to a lodger or taking a second job/working overtime if you can.
Capitalise Your Arrears
In some circumstances, you might actually be able to clear your debts by adding what you owe to the amount you owe overall and paying it back over the remaining mortgage period. This will obviously mean you’re paying back more every month, but it might be worth it if you can convince your lender to cancel the debt. Another obvious move if you’re in debt would be to extend the payment term of your mortgage so you’re paying less each month, but if you can refinance at a lower interest rate, you might not have to increase the loan term (see below).
Refinancing is something we’d recommend you do on a semi-regular basis anyway to make sure you’re getting the best deal possible, but if you are in a fair amount of debt, it’s definitely something to consider doing ASAP as it can decrease the interest rate you’re paying, saving you money that you could use to pay off your debt.
It’s fair to argue that loans are what basically got you into trouble in the first place, but taking out a short-term loan could help in a pinch if you feel your mortgage lender is going to start proceedings to file for a repossession order on your home. If you don’t want to take any more risks, you could also consider borrowing money from a friend or family member who isn’t going to charge any interest, but only borrow from them if you know you can trust them! Once you’ve worked out a loan, make a plan regarding how you’re going to pay them back (as we’ve already said, planning is crucial at every stage) and contact your lender to explain the situation to them.
If you are over 55 you might be able to use some of your personal pension to pay off your mortgage debt. However, before you do this, consider the costs you might have later in life, how long you think you’re likely to live (a sobering question we know) or if you’ll have to pay tax on money you wouldn’t have to pay tax on later. If you are currently claiming benefits, these might also be stopped or reduced if you go this route.
Giving Up Your Endowment Policy
Giving up your endowment of life insurance policy or selling it to an investor, if you have one, will provide you with a lump sum you could use you pay off your debt outright. Before you do this, however, always consult with a financial advisor, as you will have to make alternate life insurance arrangements after your endowment is gone.
Mortgage Payment Protection
If you’ve lost your job recently or can’t work because of serious illness, then you might be eligible for an MPPI policy, which will cover the cost of your mortgage.
Sale and Rent Back Scheme
These schemes are often used as a last resort if the mortgage debt has become simply too great to manage and essentially allow you to sell your home and then rent it back from them as a tenant. Beware though, as your home sale price will often be significantly lower than if you were to sell it on the open market and these schemes can be run by incredibly dodgy firms who are out to make a quick and easy buck. Also, note that you might end up being evicted from your home anyway under a sale and rent back scheme, as the tenancy agreement is often rigged against you with terms that are difficult or even impossible to meet. Before you decide on this option, we seriously recommend you getting advice from as many sources as possible and exploring every other possible avenue.
Reaching an Agreement
Once you’ve decided which of the ways and means you’ll be using to clear your debt, you will need to contact your mortgage lender and reach an agreement with them. It’s vital that you keep in touch with your lender at all times, as if they feel like you are avoiding them they will likely expedite the repossession process. Even if neither of the options above (or any other options for that matter) are available to you, you should really let your lender know the lay of the land. They might even offer some advice if they are feeling generous, as it’s in their best interests to get this solved too! Failing this, you can also receive free, impartial advice from various sources such as the Citizens Advice Bureau, or you can even pay for professional advice, though if you are already quite far in the hole, you’re probably going to want to stick to the free advice!
Clearing any debt is something you often need to take one day at a time, and mortgage debt is no different. We are talking here, however, about your home, so it’s not something you want to take lightly. So, if you have managed to fall behind with your payments, take the advice above and plan, plan, plan, keep an open mind and exercise caution and financial frugality and you’ll be free and in the clear before you know it!