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5 reasons why people get behind on their mortgage payments
- Published 08/3/2007
With arrears up by 30%, Mortgage Man looks at the reasons why...
1. Separating or getting divorced
This is easily the number one cause of mortgage strife. I think the length of the average marriage is around 10 years; on the other hand, a typical mortgage term is 25 years or more.
When a couple decide to go their own ways, paying a mortgage on a single income is usually too difficult as the loan is often validated on two incomes. Furthermore, the bulk of a repayment loan is paid back in the late years. This means that even if a couple broke up half way through the loan, the mortgage would still be considerable.
Sale of the property is usually the solution, with each partner splitting the equity. However, if one of the ex- partners decided to keep the house, it is possible to transfer equity without sale or remortgage. An understanding lender may even allow interest only payments for a period to keep the mortgage affordable.
2. Not knowing what the true cost of your mortgage is
Most prospective borrowers only look at the initial benefit period- a two year fixed rate, for instance- rather then asking whether the mortgage will be affordable over the full term of the mortgage.
It is important that you look at the reversionary rate as well as the headline- grabbing low rate. It could be that your mortgage payments go up by 2-3% after you initial period, possibly meaning adding hundreds of pounds on to your repayments every month. A good mortgage broker will draw your attention to the APR (the true cost of the mortgage over the life of the mortgage) and to the relative cost of the reversionary rate.
Some lenders- particularly sub prime lenders- have high cost rates based on LIBOR after the end of the initial benefit period. It is also true as a rule of thumb that bank's standard variable rates (SVR) will be higher than building society's.
The key to this is know what you're getting in to, otherwise you're at risk of falling behind on your payments. Key Facts Illustrations- which all lenders and brokers are required to give to you for residential mortgages- outline the APR, lender's reversionary rate, and mortgage payment after the end of the offer period.
3. Having children
Having children is an immensely expensive pursuit: from rudimentary clothing and feeding to school and university fees. In my case, my poor family ending up bailing me out in my travels! Thanks Dad.
Luckily for me, this financial support did not make my parents fall behind on their mortgage payments. However, this can be the case with other families, especially young parents struggling to cope with small children and large mortgage payments.
If the mortgage was validated by two incomes and one parent gives up work to raise the children, it will be difficult for the single income to pay the mortgage. This why the bread winner may have to get another job to compensate for the loss of the partner's income, or seek better remuneration from elsewhere.
4. Variable rate mortgages
Discounted, variable and tracker rates can be very good value, and currently they are more competitive than fixed rates. However, they are more of a gamble than fixed rates because you have to be prepared for interest rates to go up as well as down.
See if you can afford that extra 1% or so on your mortgage before you take out one of these products. If you can't afford this rise, there's a good chance that you will fall behind on your mortgage payments.
If you are on a tight budget, a fixed rate may provide the peace of mind you need.
5. Self employed
If you are self employed or have income streams which are unpredictable or infrequent, it is important that you have a flexible mortgage. The monthly payment system of a standard mortgage is tailored more to people who receive a standard monthly income.
It is possible that your business will experience fallow periods- such as over summer for mortgage brokers!- and times where income is lower. If your income falls, your mortgage payments will still have to be met. Lenders like Nationwide and Bank of Scotland allow payment holidays, which could be massively important if you are struggling financially on a given month. Bank of Scotland's Personal Choice mortgage allows a 'cheque book' as well, which you can use to draw down money from your home's equity up to a pre- agreed level.
If you are self- employed, and you really need some cash (maybe if you're a plumber and you need a new van for the business) this is an easy, flexible way of getting vital funds.
Images used under Creative Commons License
1. Separating or getting divorced
This is easily the number one cause of mortgage strife. I think the length of the average marriage is around 10 years; on the other hand, a typical mortgage term is 25 years or more.
When a couple decide to go their own ways, paying a mortgage on a single income is usually too difficult as the loan is often validated on two incomes. Furthermore, the bulk of a repayment loan is paid back in the late years. This means that even if a couple broke up half way through the loan, the mortgage would still be considerable.
Sale of the property is usually the solution, with each partner splitting the equity. However, if one of the ex- partners decided to keep the house, it is possible to transfer equity without sale or remortgage. An understanding lender may even allow interest only payments for a period to keep the mortgage affordable.
2. Not knowing what the true cost of your mortgage is
Most prospective borrowers only look at the initial benefit period- a two year fixed rate, for instance- rather then asking whether the mortgage will be affordable over the full term of the mortgage.
It is important that you look at the reversionary rate as well as the headline- grabbing low rate. It could be that your mortgage payments go up by 2-3% after you initial period, possibly meaning adding hundreds of pounds on to your repayments every month. A good mortgage broker will draw your attention to the APR (the true cost of the mortgage over the life of the mortgage) and to the relative cost of the reversionary rate.
Some lenders- particularly sub prime lenders- have high cost rates based on LIBOR after the end of the initial benefit period. It is also true as a rule of thumb that bank's standard variable rates (SVR) will be higher than building society's.
The key to this is know what you're getting in to, otherwise you're at risk of falling behind on your payments. Key Facts Illustrations- which all lenders and brokers are required to give to you for residential mortgages- outline the APR, lender's reversionary rate, and mortgage payment after the end of the offer period.
3. Having children
Having children is an immensely expensive pursuit: from rudimentary clothing and feeding to school and university fees. In my case, my poor family ending up bailing me out in my travels! Thanks Dad.
Luckily for me, this financial support did not make my parents fall behind on their mortgage payments. However, this can be the case with other families, especially young parents struggling to cope with small children and large mortgage payments.
If the mortgage was validated by two incomes and one parent gives up work to raise the children, it will be difficult for the single income to pay the mortgage. This why the bread winner may have to get another job to compensate for the loss of the partner's income, or seek better remuneration from elsewhere.
4. Variable rate mortgages
Discounted, variable and tracker rates can be very good value, and currently they are more competitive than fixed rates. However, they are more of a gamble than fixed rates because you have to be prepared for interest rates to go up as well as down.
See if you can afford that extra 1% or so on your mortgage before you take out one of these products. If you can't afford this rise, there's a good chance that you will fall behind on your mortgage payments.
If you are on a tight budget, a fixed rate may provide the peace of mind you need.
5. Self employed
If you are self employed or have income streams which are unpredictable or infrequent, it is important that you have a flexible mortgage. The monthly payment system of a standard mortgage is tailored more to people who receive a standard monthly income.
It is possible that your business will experience fallow periods- such as over summer for mortgage brokers!- and times where income is lower. If your income falls, your mortgage payments will still have to be met. Lenders like Nationwide and Bank of Scotland allow payment holidays, which could be massively important if you are struggling financially on a given month. Bank of Scotland's Personal Choice mortgage allows a 'cheque book' as well, which you can use to draw down money from your home's equity up to a pre- agreed level.
If you are self- employed, and you really need some cash (maybe if you're a plumber and you need a new van for the business) this is an easy, flexible way of getting vital funds.
Images used under Creative Commons License