Debt and Your Home

Debt and your home are intertwined when secured loans, like mortgages, are involved. Failure to repay may lead to repossession. Clear communication and seeking advice is crucial to dealing with housing debt.

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For most people, being able to keep their home is a top priority when they're in debt.  However, if you're struggling to keep up with your rent or mortgage payments, you could be at risk of eviction or repossession.

Debt can affect your home in several ways - especially your ability to keep it. Fortunately, there are steps you can take to protect your home and your belongings from creditors (the people you owe money to) whether you're worried about missing a housing payment or are already in rent or mortgage arrears.

What is housing debt?

If you own or rent a property and are struggling to make payments to your mortgage lender or landlord as agreed, you could find yourself dealing with 'housing debt'.

Here is a quick guide to housing debt and how it can affect your home:

Rent arrears

When you fall behind on your rent payments, you'll officially be in rent arrears with your landlord. Rent arrears is a 'priority debt' which means there can be serious consequences for not paying it.

Because you don't own the property, your landlord can't apply for a repossession order. They can, however, go to court and apply for an eviction order, which is a court order to evict you from the property. This will usually involve sending bailiffs to your door who will remove you from your home and secure the property to prevent you from re-entering.

Mortgage arrears

Being in mortgage arrears with your mortgage lender can have serious implications for you and your finances and your credit score will drop significantly - even after just one missed payment. However, it can also have a considerable impact on your home and, in some cases, your mortgage lender may apply for a court order to repossess your property.

This can sound daunting and it's normal to fear the worst, but coming to an agreement with your mortgage lender to repay the debt in full or in instalments can help you protect your home and avoid repossession.

How does debt affect my home?

The impact of debt on your home depends on whether you're dealing with secured debts (debts tied to your home) or unsecured debts (debts not tied to your home). The main difference between secured and unsecured debt is that, with secured debt, the creditor can repossess your home to recover the money owed if you can't or won't pay.

Here is how both secured and unsecured debt can affect your home:

Secured debt

The most common type of secured debt is a mortgage. When you sign a mortgage agreement, you essentially agree to hand over control of the property as 'security' or 'collateral'. This means that, if you don't make payments as agreed, the mortgage lender has the right to take back the property and sell it to help them recover the debt.

Many people prefer secured loans over unsecured loans because they often allow you to borrow more money at a lower interest rate. However, while this may sound like you're getting a better deal, it comes with the added risk of potentially losing your home if you find yourself in a situation where you can no longer make payments as agreed.

Unsecured debt

Unsecured debt refers to debt that isn't tied to an asset, meaning your home can never be forcibly sold to repay the debt. However, if you don't pay an unsecured debt (e.g. utility bill or rent arrears), your creditor will likely take further action against you in the form of a County Court Judgment (CCJ) and this can impact your ability to continue living in your home.

Having a CCJ will have a detrimental impact on your credit score and prevent you from being able to access further credit for several years, which can put any plans to purchase a home on hold. Some creditors may even apply for a court order to secure the unsecured debt to your home, which gives them the right to repossess your home if you repeatedly fail to repay what you owe.

What is a charging order?

When you don't pay an unsecured debt, your creditor might apply for an interim charging order to secure the debt to your home. The court will then decide if a final charging order should be issued, which will mean that, if you sell or remortgage your home before the debt is repaid, any money made from the sale must go towards paying off what you owe.

However, it's important to note that a charging order can only be issued after your creditor has already taken court action against you over the unpaid debt. Typically, this will involve serving you with a CCJ.

Additionally, for debts regulated by the Consumer Credit Act, such as overdrafts, personal loans, and credit cards, interest will stop at the point the CCJ is issued. For debts over £5,000 not regulated by the Consumer Credit Act, on the other hand, statutory interest of 8% will be added.

Will housing debt affect my credit score?

Being in debt will almost always affect your credit score, but the extent of the impact depends on whether the debt is secured (mortgage arrears) or unsecured (rent arrears) and whether your landlord or mortgage lender has taken further action against you.

For example, if you miss a rent or mortgage payment and don't pay the full amount owed within a certain time, your lender will likely report the missed payment to the main credit reference agencies who will update your credit file as necessary, resulting in a lower credit score. Depending on the terms of the credit agreement, you may also need to pay a late fee.

However, if you continue to miss rent or mortgage payments, your account will be at risk of defaulting and this can have a serious impact on your credit score, causing it to drop even further. This can make it difficult to qualify for other types of credit, such as a credit card, personal loan, bank account, or even a phone contract, for several years.

What will happen if I ignore housing debt?

"When it comes to housing debt, it's important to deal with any missed payments or default notices as soon as possible."

Because your mortgage is secured to your home, not making payments as agreed will give your lender the right to repossess the property to recover the money owed. Similarly, while your landlord owns your rental property, missing payments can still put you at risk of being evicted.

In both cases, ignoring housing debt can lead to you losing your home and being forced to find somewhere else to live at short notice. However, before this happens, your creditor should follow the correct court proceedings and give you several opportunities to repay what you owe.

Both the eviction and repossession process can take anything from a few weeks to a few months and may involve a court hearing where you'll have the chance to explain your situation to a judge.

When it comes to housing debt, it's important to deal with any missed payments or default notices as soon as possible. Even if you can't afford to repay the debt in full, coming to an agreement with your creditor can help you find a solution to deal with your debt that suits both parties.

Which debt solutions can help me protect my home?

If you're in rent or mortgage arrears and are worried about losing your home, entering into a debt solution can reduce your monthly debt payments to an amount you can comfortably afford which can allow you to free up more money to cover your rent or mortgage debt. Some debt solutions also don't require you to hand over your assets, meaning your home will be protected for the duration of your arrangement.

Here is a quick guide to some of the debt solutions that can help you protect your home:

Individual Voluntary Arrangement (IVA)

An IVA is a formal agreement between you and your creditors to repay your debt through a series of monthly payments based on your income and expenditure, meaning you should always be able to afford your repayments. Most IVAS last 12 months and, at the end of your arrangement, any remaining debts will be written off.

When you have an IVA, you'll usually be asked to remortgage your home during the final year of your arrangement. However, if you can't remortgage or it would be too expensive to do so, your IVA will simply be extended by 12 months to allow you to make extra payments.

Protected Trust Deed (PTD)

IVAs are only available in England, Wales, and Northern Ireland, but PTDs are available in Scotland and are extremely similar. They allow you to repay your debt through a series of monthly payments based on what you can comfortably afford and put a stop to further interest and charges being added.

Once your PTD has been approved, it may be possible to exclude your home from your arrangement, which means its value won't be taken into account and you won't be forced to sell it to recover the debt.

Debt Management Plan (DMP)

A DMP is an informal agreement between you and your creditors to repay your non-priority debts, like credit cards, personal loans, and store cards, at an affordable rate. This may be a suitable option for you if you own your home and can afford to make monthly payments towards the debt.

The level of equity in your home also won't be taken into consideration with a DMP, so as long as you stick to the terms of the agreement and keep up with your repayments as agreed, you can apply regardless of whether you're a homeowner or a tenant.

Debt consolidation

Debt consolidation is when you take out a loan to repay multiple debts through a single monthly payment. Rather than making monthly payments to several creditors, you just need to make a single monthly payment to a debt management company that will distribute the money among your creditors, making dealing with multiple debts much more manageable.

This can make it easier to budget for housing costs and allow you to free up money to repay your rent or mortgage arrears as you'll have fewer individual debts to worry about. Depending on your situation, you may also be able to reduce your monthly payments and benefit from lower interest rates.

Debt Relief Order (DRO)

A DRO is a way to deal with your debt if you owe £30,000 or less and have little to no spare income or assets. During a DRO, you don't have to make any payments towards most of the debts included and any remaining debts will be written off once your arrangement comes to an end (usually after a year).

Unlike some other debt solutions, a DRO is legally binding, which means your creditors can't take further action against you until your arrangement comes to an end.

Can you get a mortgage when you're in debt?

"Generally, the lower your debt to income ratio, the more confident a lender will be to enter into a credit agreement with you, and the better chance you'll have of being approved for a mortgage."

Getting a lender to agree to give you a mortgage when you're in debt can be extremely difficult, but it's not impossible. How smooth the process will be for you, however, depends on your individual circumstances and whether you're in a debt solution.

Because mortgage lenders just want to know that you can make your payments in full and on time, being in debt may actually help your chances of getting a mortgage if you can prove you're making regular repayments.

Here are some of the factors that will be taken into account when you apply for a mortgage with debt:

Debt-to-income ratio

When you apply for a mortgage, one of the first things lenders will look at is your debt-to-income ratio. This is just another name for the percentage of gross monthly income you put towards your debts each month. For example, if your gross monthly income is £1,250 and you pay £250 towards your debt each month, your debt-to-income ratio will be 20% (250/1,250 x 100).

Generally, the lower your debt-to-income ratio, the more confident a lender will be to enter into a credit agreement with you, and the better chance you'll have of being approved for a mortgage. Most mortgage lenders favour a debt-to-income ratio of 35% or less.

Expenses

Another factor that will be considered when you apply for a mortgage is how you handle both day-to-day and larger expenses. Some lenders will be more likely to consider your mortgage application if you can prove you've cut back on other, non-essential expenses. This can be done by keeping copies of bank statements or receipts.

For example, if you can prove you've reduced or eliminated discretionary expenses, such as hobbies, entertainment, and dining out, this can demonstrate that you have a responsible attitude towards debt repayment and are committed to dealing with your debts effectively.

Credit rating

One of the first factors a lender will look at when you apply for a mortgage is your credit rating. This is a three-digit number that is based on your credit history and determines your 'creditworthiness' or, in other words, the likelihood that you'll repay the money borrowed.

Generally, the better your credit rating, the better your chances of qualifying for a mortgage. Being in debt will naturally decrease your credit score - regardless of the type of debt - but it will gradually improve over time if you make regular payments towards what you owe.

I've received a notice of repossession, what should I do?

If you've received a notice of repossession, it's important you follow any instructions you are given and, if necessary, seek expert debt advice before you respond. Most landlords will only send a notice of repossession after several failed attempts at getting in touch with you so it should never come out of the blue or take you by surprise.

Similarly, if the notice of repossession includes a court date or court hearing, you must attend. This may sound scary, but it can give you an opportunity to explain your situation to a judge and agree on a payment plan that prevents you from losing your home.

Even at this stage, it’s not too late to negotiate a repayment arrangement with your lender and, if you're in a position to make small payments towards the debt, this will be taken into account by the judge. The court will then decide if you should be allowed to stay in the property or not.

What does it mean if my home is worth less than my mortgage?

When your home is worth less than your mortgage, this is known as being in 'negative equity' and essentially means the value of your home is less than the amount you still owe on your mortgage.

For example, if you bought your home for £150,000 with a £120,000 mortgage but the value of the property has since dropped to £100,000, you'll be in negative equity. Alternatively, if you bought your home for the same price with the same mortgage but the value of the property is now worth £130,000, you won't be in negative equity.

This won't necessarily cause any problems for you unless you're planning to sell your home as the negative equity will leave you with a mortgage 'shortfall'. The best thing to do when you're in negative equity is to continue paying off your mortgage as normal and wait for property prices to rise as this will put you back into positive equity.

Conclusion

For most people, their home is the single most valuable thing they'll own in their lifetime. Because of this, a creditor might threaten to take legal action against your home in an attempt to force you to pay your debts or, in rare cases, apply for a charging order to secure an unsecured debt to your home.

However, while there is a strong link between debt and your home, there are steps you can take to protect your home and prevent you from losing it to bailiffs. When it comes to housing debt, the sooner you seek expert help and advice, the sooner you can get your debts under control and stop the situation from escalating.

Key Takeaways

  • Housing debts are debts that can arise due to falling behind on your monthly mortgage or rent payments
  • When a creditor has already gone to court over an unpaid debt but hasn't received payment, they may apply for a charging order to secure the debt to your home
  • Having housing debt will negatively affect your credit score and make it difficult to get approved for a mortgage
  • If you continue to ignore mortgage or rent arrears, your lender may serve you with a repossession or eviction order to get you to leave the property
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