Could you pay your mortgage following a financial shock?
When you take out a mortgage, banks will assess the affordability to ensure you can continue to meet repayments. However, it’s impossible to know what’s around the corner. If a financial shock affected your income, would you be able to keep up with the mortgage?
For many, a mortgage is the biggest monthly expense they have. While you may have taken some time to consider how a new mortgage would affect your budget, have you ever thought about how you’d cope if your income stopped or fell? Building up financial resilience now can ensure you’re more secure should you face a financial shock.
Missing a mortgage payment can cause stress, mean you lose your home, and can have a long-term impact on your ability to borrow.
While banks will work with you if you’re facing financial difficulties, if you miss a mortgage payment it can have negative consequences. Usually, a missed payment will be noted on your credit report, which will affect your credit rating and potentially whether you can borrow money in the future. Your lender is also likely to add late fees to the payments, adding further financial pressure.
If you fall behind on mortgage payments by 90 days, this will often mean you’ve defaulted on the loan. At this point, a lender can begin repossession actions. This can lead to eviction, losing your home, and court action that will show up on your credit report.
If you find yourself in a position where you can’t make mortgage repayments, you should speak to your lender. They may be able to offer you a mortgage holiday or extend your mortgage term to reduce payments.
Taking steps to improve your financial resilience can mean you have a safety net to fall back on should a shock unexpectedly affect your income.
3 steps that can help you pay your mortgage in a crisis
1. Build an emergency fund
An emergency fund means you have accessible cash to use should you face a financial shock, whether because the boiler needs replacing, or you can’t pay your mortgage from your income.
While important, Hargreaves Lansdown research found one in four people don’t hold any savings at all. The fact that four in ten people have suffered expenses out of the blue in the last year, with an average cost of £1,420, demonstrates why an emergency fund is important. An emergency fund can provide you with the money you need in the short term following a financial shock.
Your circumstances and financial commitments will play a role in the size of the emergency fund you should build up. However, a general rule of putting away three to six months’ worth of essential expenses is a good place to start.
2. Make mortgage overpayments
There are many benefits to overpaying your mortgage. One of the most common reasons is that it will reduce the cost of borrowing over the long term and mean you’re mortgage-free sooner.
However, it can also provide you with some flexibility if you face a financial shock. As you’ll be ahead on your mortgage payments, it could allow you to take a mortgage holiday if you need to without extending the term of your mortgage. For short-term shocks, it can mean your long-term goals stay on track while still providing you with some breathing space.
You can choose to make regular overpayments or a one-off lump sum. However, keep in mind that you won’t be able to withdraw this money for other purposes. If you don’t have an emergency fund, building one before making overpayments makes sense for most people.
You should also check your mortgage paperwork, as overpayments could lead to additional fees in some cases. Usually, you can overpay your mortgage by 10% before you incur additional charges but you should always check first.
3. Take out appropriate financial protection
Having an emergency fund and being able to take a repayment holiday are good options for financial shocks that affect short-term affordability. But what if your income is affected in the long term? This is where financial protection can provide peace of mind.
Critical illness cover pays out a lump on the diagnosis of certain conditions named within the policy. While an income protection policy could pay a regular income if you’re unable to work due to an accident or illness. Understanding what circumstances would put a strain on your household finances can help you select an appropriate financial protection policy. It means that should a financial shock have a long-term impact, you can continue to meet financial commitments, like your mortgage.
If you’d like to discuss how you can create a safety net to ensure your mortgage payments can be met, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home maybe repossessed if you do not keep up repayment on your mortgage.
Protection plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.