What to do when you can't afford the mortgage

An answer to the question posted by reader Brian Roberts on Ask Citywire.

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With millions of workers on short time and bonuses being cut Citywire readers will easily identify with the mortgage problem being experienced by a reader’s son. 

‘My son has had to take a £5,000 cut in his salary and is now going to have difficulty with his mortgage payment. He wants to sell his house and rent. He is not in negative equity so will have about £40,000 in his pocket. Should he sell and rent or renegotiate his mortgage and how would he go about it?’ asked Brian Roberts.

Generally speaking because the costs of buying and selling are relatively high, it pays to keep a property if you can. But there are several other considerations. If Chris, the son, has suffered a big drop in salary, he may well not be able to borrow as much next time round if he wants to get back into the property market.

Affordability considerations are much tougher today than they were three years ago – and they are not getting any easier. In addition, Chris runs his own business and if he originally borrowed on a self-certification mortgage (where a borrower does not have to provide proof of income), these are no longer available. 

To qualify for a mortgage now he will need three years' audited accounts. ‘It is much tougher for the self-employed to get a mortgage than in the past because of the demise of self-cert – but it is not impossible so long as you can prove your income,’ said Melanie Bien, director at mortgage broker Private Finance. 

If the £5,000 salary reduction doesn’t make it impossible to live – but just means there is less money for entertainment, cigarettes, eating out etc – it would usually be best to tighten the belt and try to hang on until there is an upturn in the business. 

‘We are in the process of selling our house, having advertised it with Connells, and are seriously contemplating going into rented accommodation,’ said Chris. ‘This would greatly reduce our monthly outgoings whilst leaving us with a cash lump sum to invest. We have considered changing our mortgage but feel that with the precarious nature of our business at the moment this may be delaying the inevitable. At the moment, the loan we have is a repayment mortgage,' he said.

Chris is paying £1,300 a month on a £200,000 home loan. With a repayment mortgage there are ways of reducing outgoings. He can ask his lender to allow him switch to an interest-only loan, or extend the term of the loan, both of which will reduce his monthly mortgage expenditure considerably.

For example, outgoings on a repayment mortgage of £200,000 over 20 years at 4% work out at £1,228 a month – a little less than the £1,300 Chris is paying. If he switches to an interest-only loan the outgoings drop to £666. Similarly if he were to temporarily extend the loan to 30 years the monthly outgoings on the same repayment loan are reduced to £964. Either of these options could be a short-term solution depending on how long Chris expects the reduction in his earnings to last.

‘Your lender may allow a period of interest-only to ease the monthly cost,’ confirmed David Hollingworth of fee-free mortgage broker, London & Country. ‘However this will cost more over the longer term so get back onto a repayment basis as soon as your situation improves and stabilises,’ he advised.