The worst way to pay your mortgage

Millions of homeowners have used credit to meet their monthly mortgage repayments. But it's a terrible thing to do!

Up to seven million UK households relied on some form of credit to help pay their mortgage or rent last year, according to the latest survey from Shelter.

In December, the housing charity -- together with pollsters YouGov -- asked over 4,000 British adults whether they had used loans, credit cards, unauthorised overdrafts or payday loans to help pay their rent or mortgage in the previous 12 months.

Shockingly, more than one in seven (15%) of those interviewed admitted that they had used credit at least once to meet their monthly mortgage payments or rent in 2011. With around 48 million adults in the UK, this means that seven million of us were forced to borrow merely to keep a roof over our heads!

The peril of payday loans

Even worse, Shelter's survey found that close to a million (936,000) of these hard-pressed Brits had taken out payday loans to meet their housing costs.

The really shocking thing about payday loans is the rates of interest they charge. Typically, these short-term loans for small amounts (usually under £400 for, say, a month) charge yearly interest rates of between 250% and 4,500% APR (Annual Percentage Rate).

Even so, as banks turn their backs on high-risk borrowers, the market for payday loans and doorstep lending tripled in four years to reach £2 billion in 2010. What's more, research firm Datamonitor expects this 'subprime' lending market to grow to £3.5 billion by 2014.

Frankly, even the biggest lenders in this field are not much better than loan sharks waiting to prey on the poor and vulnerable.

Two more terrible ways to pay

Of course, when your finances are shaky and you start slipping into debt, you can quickly enter a downward spiral. In the worst-case scenarios, this descent into debt can lead to insolvency, bankruptcy and even homelessness.

However, borrowing at high rates of interest simply to pay your mortgage or rent is almost always a terrible idea. While it's vital to keep the roof over your head, expensive or unauthorised borrowing is unsustainable and will eventually make your situation worse.

It's not just payday loans though. Here are two more terrible ways to borrow to help pay your housing costs:

1. Unauthorised overdrafts

If you go overdrawn without authorisation, or exceed your approved overdraft limit, then you'll be charged interest at rates of between 15% and 30% APR. In addition, every time you bounce a payment or increase your unauthorised borrowing, you'll be walloped by fines of between £20 and £40.

Thanks to these grossly unfair fees, an unexpected dip into the red could cost you hundreds of pounds in penalties. Therefore, this is a cripplingly costly way to pay your home loan or rent.

2. Credit cards

While all major mortgage lenders accept payment by debit card, it's very hard to pay your home loan by credit card. In fact, I don't know of a single mainstream lender willing to do this on a regular basis. This is partly because of the high merchant fees (between 1% and 2%) charged by MasterCard, Visa and other card networks.

However, desperate borrowers can get around this problem, either by using credit card cheques or by withdrawing cash using a credit card. Again, both of these methods can be horribly expensive, thanks to steep withdrawal or handling fees, plus rates of interest that can exceed 30% APR.

In short, using a credit card to get cash to pay your mortgage or rent is terribly expensive, and should never be done except in a dire emergency.

What should you do?

Once you've used an overdraft, credit card or loan to pay one mortgage repayment, it's tempting to repeat this mistake. Hence, what starts off as one bad month rapidly becomes a fight to pay your basic bills. Once you go down this slippery slope, things quickly snowball and it can become impossible to stop sliding downwards.

So if you're having difficulty meeting your mortgage payments, don't bury your head in the sand. First, contact your lender and set out your situation openly and honestly. Also, if you can't meet your full monthly repayment, then do show willing by paying what you can.

Your lender should offer you temporary help, such as lowering your monthly payments by switching from a repayment mortgage to a cheaper, interest-only loan. It may aso allow you to pay only part of your monthly interest bill, while adding the remainder to your outstanding balance. However, this can only happen for a few months, until you're back on your feet.

In extreme circumstances (such as unemployment, sickness or bereavement), your mortgage lender may offer you valuable breathing space by giving you a full 'payment holiday'. You will have to pay back these missed payments -- plus interest -- over time.

In short, pay what you can and take whatever help you can get. Mortgage lenders regard repossession (and landlords regard eviction) very much as a last resort. With banks under huge pressure from regulators and politicians, they are terribly reluctant to repossess (seize) homes from struggling borrowers. After all, since the banking meltdown, we taxpayers own large chunks of Lloyds and RBS!

Finally, registered charity Shelter has a network of specialist advice services around the country, plus a free telephone helpline and online advice available at www.shelter.org.uk/debt, including a new budget calculator.

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