Don't Let Your Mortgage Drive You Into Debt

As mortgage repayments become even more unaffordable, borrowers are resorting to desperate measures to keep up.

Back in February, almost 130,000 mortgages* were at least three months in arrears. Not a great start to the year. And I suspect things will get worse as the year goes on.

That's because 1.4 million people have special fixed-rate mortgage deals, which are due to come to an end this year. While these borrowers have enjoyed a relatively low rate over the last couple of years or so, the credit crunch now means that many won't be able to re-mortgage to an equally competitive rate.

Falling back on credit

As more people struggle to meet their mortgage repayments, I fear that more borrowers will resort to their credit cards to make ends meet.

Look at these figures from homelessness charity, Shelter. Its new Breaking Point Report claims:

"4.1 million households (16 per cent) have used a credit card to help meet their housing costs in the last 12 months", and

"2.8 million (11 per cent) have been forced to borrow money [from friends and family or personal loans] to meet their housing costs in the last 12 months."

While these statistics apply to homeowners and tenants alike, it gives a clear indication of the hardship facing many borrowers. 

This has led to an increase in using credit to pay essential bills. But that only further exacerbates the situation. After all, the average credit card APR stands at around 16 per cent, making it an expensive way to borrow, which far exceeds mortgage interest rates.

Worse still, if you use your credit card to withdraw cash to meet your monthly repayments, expect a heavy bill in return. I checked half a dozen popular credit cards today, and found that the interest on cash advances is charged at various rates between 21.66 per cent and 27.9 per cent.

On top of that, you'll also incur a cash-handling fee on each transaction of typically 2.5 to 3 per cent. While this may be a tempting short-term fix, it is not a Foolish way of keeping your head above water. 

The report also highlights the cutbacks borrowers are taking to keep the roof over their heads, including spending less on food and selling personal possessions as well as spending less on their children.

These drastic measures are not surprising given that 2.2 million (9 per cent) households are spending more than half their income on housing costs.

So, what can you do if you're struggling to meet your repayments?

Don't go it alone.

Covering your mortgage repayments with your credit card or a loan is a clear indication that your mortgage debt is becoming a problem. Sure it's one way of paying the bills, but it only stores up even more affordability problems for the future. You should always avoid resorting to your credit card to make ends meet, even if it seems like the only option.

Don't suffer in silence.

Obviously no one likes to shout financial problems from the rooftops, but if you're beginning to feel like you can't keep up, you must speak to your lender, and soon. Lenders don't want to repossess your home. This is a last resort for everyone concerned, so you may find they are more willing to help than you think.

You could try to negotiate taking a payment holiday. Alternatively, you may be able to reduce your repayments by extending your mortgage term, or temporarily switching to an interest-only mortgage until you get back on your feet.

Do think about re-mortgaging

If you've already got a pretty low rate, getting an equally competitive re-mortgage may be tricky, but it's still worth speaking to a broker to see if there are any better deals out there.

That said there could be room for manoeuvre if you're already on the lender's standard variable rate (SVR) mortgage. Around one in five borrowers are paying the SVR, which is usually the lender's most expensive home loan.

If you're on the SVR, you may be able to cut your repayments significantly by switching to a lower-rate deal. Try speaking to a whole of market broker today at The Motley Fool Mortgage Service.  

Do make the most of the good times

Perhaps you have just received a bonus or you've got savings going spare. Think about overpaying your mortgage when times are good. Not only could you save thousands in interest by clearing your mortgage early, but you'll also build up a reserve which you may be able to fall back on when times are harder. Check that your mortgage is flexible and allows overpayments. Most do.

Remember, using credit to pay your mortgage means you're burying your head in the sand. You need to try to tackle the problem head on. Good luck.

* Arrears statistics are from the Council of Mortgage Lenders (CML), February 2008.

More: Fight Your Way Out Of Debt Darkness / 7 Tips To Seriously Reduce Your Debts / Help and advice can be found on The Motley Fool Dealing With Debt discussion board. / Visit The Motley Fool Mortgage Service