What Are Mortgage Underpayments?
A mortgage underpayment is when you pay less than your agreed monthly mortgage payment. This is usually a temporary arrangement, either due to financial difficulties or as part of a flexible mortgage agreement. It’s the opposite of an overpayment, where you pay more than required to reduce your balance faster.
Do all mortgages allow underpayments?
Not all mortgages allow underpayments. They’re typically a feature of flexible mortgages or may be offered by lenders in cases of financial hardship.
Some lenders, such as Nationwide, will allow you to make underpayments if you have made overpayments to your mortgage and built up an overpayment reserve.
Always speak with your lender to see if underpayments are an option for you before underpaying your mortgage.
When Might You Consider Underpayments?
You might consider asking to make underpayments if you’re experiencing temporary financial difficulties, such as a reduction in income or unexpected expenses. Some borrowers with flexible mortgages might use underpayments to manage their cash flow, balancing them with overpayments at other times.
What are the consequences of Making Underpayments?
Making underpayments can have several consequences
Increased Mortgage Balance
When you make underpayments, the unpaid portion of your regular payment is added to your total mortgage debt. This means your overall mortgage balance increases instead of decreasing as it would with full payments. For example, if your monthly payment is £1,000 and you underpay by £200 each month for six months, your mortgage balance will increase by £1,200.
Longer Mortgage Term
As a result of the underpayment, you may need to repay your mortgage for a longer period than originally planned. Your lender might extend your mortgage term to keep your monthly payments manageable once you resume full payments. For instance, if you were originally on track to pay off your mortgage in 25 years, underpayments might extend this to 26 or 27 years. This means you’ll be in debt for longer and will be paying your mortgage into a later stage of your life, potentially affecting your retirement plans.
More Interest Paid Over Time
You may end up paying more interest over the life of your loan. This is because interest is calculated on the outstanding balance, which is now higher due to the underpayments. Even if the interest rate remains the same, you’ll pay more in total because you’re paying interest on a larger amount for a longer time. This additional interest can be substantial – potentially thousands of pounds over the life of your mortgage.
Potential Credit Score Impact
If underpayments are made without the lender’s agreement, they may be recorded as missed or late payments, which can damage your credit score. Even with agreed underpayments, if they’re part of a pattern of financial difficulty, this may be reflected in your Credit Report
Future Remortgaging Challenges
A history of underpayments may make it more difficult to remortgage in the future. Repeated use of underpayments or other financial assistance measures (like payment holidays) might suggest to future lenders that you struggle to manage your finances.
Lenders can see your payment history and may note periods of underpayment when considering a remortgage application. A pattern of underpayments, even if agreed, may make you appear as a higher-risk borrower.
What are the alternatives to Underpayments?
There are several alternatives to making an underpayment on your mortgage. Each of these alternatives comes with its own set of pros and cons. Before making any decisions, it’s advisable to speak with your lender and consider seeking independent financial advice to fully understand the implications of each option.
Payment Holidays
A payment holiday is a period during which your lender agrees to temporarily pause your mortgage payments. This can provide immediate relief if you’re facing short-term financial difficulties. However, it’s crucial to understand that interest continues to accrue during this period, and the missed payments are typically added to your overall mortgage balance. This means you’ll likely pay more in the long run and may face higher monthly payments when the holiday ends. Always discuss the terms and potential consequences with your lender before agreeing to a payment holiday.
Remortgaging
Switching to a new mortgage deal, either with your current lender or a different one, could potentially lower your monthly payments. This might be particularly beneficial if you’re on your lender’s standard variable rate, which is often higher than fixed or discounted rates. By remortgaging to a lower interest rate, you could reduce your monthly outgoings without the long-term consequences of underpayments. However, be aware that remortgaging may involve fees. It’s also important to consider the overall cost over the entire mortgage term, not just the immediate monthly savings.
Extending Your Mortgage Term
Another option to consider is extending the overall term of your mortgage. This spreads your remaining balance over a longer period, potentially reducing your monthly payments. However, keep in mind that while this lowers your immediate outgoings, you’ll pay more interest over the life of the mortgage. This option may be suitable if you’re facing a long-term change in your financial circumstances.
Switching to an Interest-Only Mortgage Temporarily
If your mortgage allows, you might be able to switch to an interest-only payment plan for a set period. This means you’ll only pay the interest on your mortgage each month, significantly reducing your outgoings. However, you’re not paying off any of the capital, so your mortgage balance won’t decrease. This should only be considered as a short-term solution, and you’ll need a plan to return to repayment and make up the shortfall in capital repayments.
Government Support Schemes
Depending on your circumstances, you might be eligible for government support. In Scotland, for example, the Home Owners’ Support Fund offers two schemes: Mortgage to Rent and Mortgage to Shared Equity. These can help homeowners who are at risk of repossession. It may be worth investigating whether you qualify for any such support.
Downsizing
While potentially a more drastic step, selling your current home and moving to a less expensive property could significantly reduce your mortgage payments. This option might be worth considering if your long-term financial outlook has changed substantially since you took out your mortgage.
Seeking Financial Advice
Consulting with a financial advisor can provide you with a comprehensive view of your financial situation and help identify ways to manage your mortgage payments more effectively. They can review your income, expenses, and debts to create a budget that might free up funds for your mortgage payments. Additionally, they can advise on potential benefits or support you might be eligible for, and suggest long-term strategies to improve your financial health.
How to Request Underpayments
If you need to make underpayments, contact your lender as soon as possible. They’ll assess your situation and may ask for evidence of your financial circumstances.
Returning to Normal Payments
After an underpayment period, you’ll need to resume normal payments. Your lender may increase your future payments to make up for the underpaid amount, or they might extend your mortgage term.
Further Reading
- Underpayments your Nationwide mortgage
- Overpayments and underpayments with Barclays
- Overpayments and underpayments with Lloyds bank