When Mortgages Go Bad

Mortgages can, and some do, go bad. It's not uncommon for people to take out mortgages beyond their ability to repay, or for those who take out mortgages that stretch their finances to the limit. So, what happens when mortgages go bad, and how do we deal with it?

There are different circumstances under which a mortgage can turn into your worst nightmare, such as:

1. Mortgage puts a severe strain on your outgoings

If more than 85% of your outgoings are purely on your mortgage, you are a victim of a stretched income. If you took your mortgage out at an attractive rate, you may have come to the end of your deal, thus putting you in liability for a higher repayment amount with any elevated rises in the mortgage interest rate. When taking out a mortgage, you should always bear in mind changes in circumstance as well as how much you have remaining each month for other essential items.

2. Interest rate rise puts your income out the window

If you struggle to meet your mortgage repayments because of rising interest rates, it may be time to re mortgage or consider various other options. Pushing your income to its limits when you first apply for a mortgage is a bad idea, as after 2-3 years, your rates can rise, your deal could come to an end, as well as the Bank of England interest rate rising.

3. Unforeseen circumstances can leave you in a disabling state of mind

If you have been hit by unforeseen circumstances and are not covered by payment protection insurance or any other form of repayment protection, then you may be bearing the brunt of the situation. Unforeseen circumstances can include injury by accident, illness, or unemployment.

So, that gift-wrapped mortgage at 5% may have changed significantly since you first took it out. Many people still do not consider what they can realistically afford when taking on a mortgage. That extra lump of interest on your mortgage could make the difference between being a good, reliable payer and someone in arrears, mounting up bad credit.

Mortgages are not always what they seem. It is vital to read any small print before proceeding with any form of mortgage application. There may be hidden interest charges and penalties to compensate for a lower interest rate, so that 5.29% rate you saw in the high street window may be laced with charges exceeding £2,000 to £5,000, which compensate for a slightly higher rate to look more attractive.

Good mortgages can turn bad. Prepare yourself and save for rainy days to ensure your mortgage stays in your good books, rather than leading to arrears.