In this brief blog, we will cover mortgage default, what you can do to avoid mortgage default, what you can expect if you anticipate you will default on your mortgage and if you can get a mortgage with a default.
What is a mortgage default?
A mortgage default can be when you haven't made a mortgage payment in 90 days. At this point, the mortgage lender will have already written to you offering help and explaining the dangers of defaulting on your mortgage. A mortgage default will be registered on your credit file and this will usually damage and reduce your credit score.
How to avoid a mortgage default?
There are several ways you may be able to use to avoid a mortgage default if you are struggling to make your monthly mortgage repayments.
Mortgage repayment holiday
A mortgage repayment holiday is when a mortgage lender offers you the ability to stop making your monthly mortgage repayments for a fixed period of time. This will usually allow you to prepare your finances and avoid you having a mortgage default. Mortgage repayment holidays are usually given if you have a reasonable chance of actually making the monthly mortgage repayments in the future.
When you resume making your monthly mortgage repayments you will find that they have risen for a fixed term. This is because to bring your account up to date you will now need to overpay on your mortgage. You will also incur more interest by taking a mortgage repayment holiday as you will carry a balance which doesn't decrease during your mortgage repayment holiday term and you will still be charged interest for carrying this balance although you won't make any monthly mortgage repayments towards it.
Reduced mortgage repayments
Reduced mortgage payments are also a good way to avoid getting a mortgage default as they will allow you to still make some payments towards your mortgage whilst you sort out your financial situation. As with a mortgage repayment holiday, reduced mortgage repayments may end up costing you more in interest and you may have to overpay on your mortgage to bring your account back up to date.
Support for mortgage interest
The support for mortgage interest scheme is a government scheme which pays for the interest portion of your mortgage if you claim it and receive a certain type of benefit. You will have to repay the support for mortgage interest scheme when you die or sell the home. The support for mortgage interest scheme could help you avoid mortgage default.
Remortgage to a cheaper rate
You may also be able to remortgage to a different rate by doing a mortgage product transfer or remortgaging with a different mortgage lender. You will need to meet the mortgage lenders mortgage affordability requirements and a remortgage may be a very good way to avoid a mortgage default by reducing your monthly mortgage repayments to an affordable rate. This, of course, isn't a guarantee and is based on the mortgage rate which you are offered.
Increase your mortgage term
You may be able to increase your mortgage term as a way to avoid mortgage default. An increase in mortgage term should reduce your monthly mortgage repayments but most mortgage lenders who offer you an increase in mortgage term will want to see that you can continue to keep up on your monthly mortgage repayments for the increased term and this may be difficult if the increased mortgage term runs past when you retire.
Switching to an interest-only mortgage
You may be able to switch to an interest-only mortgage in order to avoid a mortgage default as interest-only mortgages usually have a cheaper monthly mortgage repayment and could be more affordable than your current monthly mortgage repayment. An interest-only mortgage will need a repayment vehicle with which you will use to pay off the mortgage balance at the end of the interest-only mortgage term.
If the mortgage lender isn't satisfied with your interest-only mortgage repayment vehicle then you may not be able to use an interest-only mortgage to avoid mortgage default.
switching to a part and part mortgage
If an interest-only mortgage isn’t a viable option to avoid a mortgage default then you may be able to switch to a part and part mortgage. This is essentially part interest-only mortgage and part capital repayment mortgage.
A part and part mortgage may have cheaper monthly mortgage repayments than your current mortgage due to the interest-only mortgage element. You may also be able to qualify for it much easier as your interest-only mortgage element will need a smaller capital repayment vehicle due to the fact that some of the mortgage balance will have already been paid off by the capital repayment element of the part and part mortgage.
Claiming on your mortgage payment protection insurance
If you have lost your job or had a serious accident that has made you unable to work and you have mortgage protection or some sort of mortgage insurance then you may be able to claim on this product in order to avoid mortgage default.
Get an equity release product
Getting an equity release could also be a suitable alternative to succumbing to mortgage default. An equity release product is for those over 55 who have equity in their homes they want to release. With an equity release product, you don't make any monthly mortgage repayments if you don't want to and the balance owed on the equity release product is paid off when you die or move into long term care by selling the home.
If you did everything you could and you still couldn't avoid the mortgage default then you will usually receive a default notice.
What is a default notice?
A default notice is a letter that a creditor will send to you after you have missed between 3 and 6 consecutive payments. A default notice is a legal requirement but doesn't mean legal proceedings have begun against you or will begin against you.
Only creditors who have transacted a product regulated by the consumer credit act can issue a default notice and the default notice will typically include the below information:
- How much you currently owe
- What terms of your credit agreement you broke
- The timeframe you have to make the payments which are in arrears
- What will happen if you don't bring your account up to date
- How much you need to pay to clear any arrears.
- How long you have to bring the account up to date: this will usually be 14 days
A default notice will give the creditor some legal rights.
They can for example:
- Decide to close your account and demand that the full balance be repaid to them
- They can start a county court judgement proceeding or any other court proceedings they see fit.
- They can sell the debt on to a debt collection agency
- They can start any repossession proceedings as they see fit.
What you should do if you get a default notice?
A default notice is pretty serious, if you receive in you shouldn't just ignore it. You should seek debt advice from charities such as step change
If you can afford to bring your account up to date then you should do so, if you can then you may want to inform the creditor of your current financial situation. In most cases, the creditor will look to come to some sort of agreement on how you can repay what you owe and then they will cease further action.
If you receive a default notice and pay the amount owed in the time stated then you can ask the creditor to ensure the default notice is removed from your credit file. You should check that this has been done by checking all four credit bureaus (including Crediva). You can use a service such as Checkmyfile to check all four credit bureaus and get a copy of your credit file. If you see that any credit bureau is still reporting the default notice on your file then you should contact them and request for it to be removed.
If you can pay to have the default cleared but you don't want to because you have a dispute with the organisation then you should look to inform the creditor so they are aware of this and try to remedy the situation.
Paying and clearing the default within the 14 days that most creditors will give you is usually the best way to go about things rather than have a county court judgement or any other court proceedings against you.
Which defaults are the most serious?
All defaults are serious but most mortgage lenders will usually have a ranking scale and accept some defaults over others due to how they deem them.
Mortgage defaults are usually viewed as the most serious while credit card defaults and loan defaults, depending on their size may be viewed as less serious defaults.
Defaults on utilities, phone contracts and store cards may be also considered as much less serious and accepted by most mortgage lenders.
Each mortgage lender will have its own criteria on how it views defaults and so if defaults are a major concern for you then you should consider speaking to a bad credit mortgage broker who may be able to help you get a mortgage with a default.
Mortgage defaults will usually last on your credit file for more than 6 years although can be removed if satisfied within the time allotted by the creditor and can also be marked as satisfied.
Can you get a mortgage with a default?
Yes, it is very possible to get a mortgage with a default but you may need the help of a bad credit mortgage broker who may be able to asses and understand your mortgage needs in more detail.
Mortgage lenders will have different criteria on how they view and accept defaults and most mortgage lenders will want to see that the default has now been satisfied or that the default was below a certain amount.
In some cases, mortgage lenders will rank the default based on the credit type as you can see above and mortgage defaults will often be looked upon as the worst and getting a mortgage with mortgage default, whilst possible may prove a very had challenge.
You will find that most high street banks won't offer mortgages with defaults but a variety of non-high street mortgage lenders may be willing to offer you a mortgage if they deal in the bad credit mortgage market.
On the plus side defaults and mortgage defaults may be considered a better form of bad credit than having a bankruptcy or IVA. Having a default with other bad credit issues such as a CCJ, IVA or bankruptcy will make it almost impossible for you to get a mortgage.
If you are unsure if you have any of this then you should check the four credit bureaus including Crediva to see what your credit file holds on you. You can use a service such as Checkmyfile to check all four credit bureaus.
Can you get a mortgage with a satisfied default?
Yes, you may be able to get a mortgage with a default if you have satisfied the default.
A satisfied default will likely mean that your credit score gets a bit of a boost but the default will still remain on your credit file for 6 years. If it was satisfied within the timeline provided by the creditor then you may be able to get the default removed. In this case, you should ensure it has been removed from your credit file by checking all your credit reports through Checkmyfile.
Most mortgage lenders will look more favourable on you than if you hadn't. Most mortgage lenders will also consider how long ago a default was placed on your credit file. The longer it has been since you got a default, the better.
You should still look to build credit by following best tips and guides as this will help you increase your mortgage affordability and give you the chance to remortgage to a cheaper rate deal in the future.
How Soon After a Default Can I Get a Mortgage?
The longer the better. Most mortgage lenders will consider how long it has been since the default and a few months or years could be the difference. You should remember that a default will stay on your credit file for 6 years.
Can I get a mortgage if the default has been removed?
If the default has been removed from your credit file you may see that your mortgage options will increase as your mortgage affordabilty has now gone up significantly.
If you still have other bad credit markers on your credit file such as :
Then you may still find it hard to get a mortgage and may need the help of a bad credit mortgage broker who may be able to assess your mortgage options and advise you on suitable mortgage lenders who may be willing to lend to you.
how much mortgage deposit do you need for a mortgage with a default?
If you want to get a mortgage with a default you should expect to put down a larger mortgage deposit than those without defaults. This is simply because most mortgage lenders will offer loan to value rates which are much smaller than usual, with 65% or 70% loan to value rates common.
This means you can expect to put down a mortgage deposit of between 15% and 30% for a mortgage with a default.
You should check with any of the home buying schemes below who you are eligible for to see if they will let you use the scheme even though you have had a previous default.
The schemes include:
- Lifetime ISA- gives you a government bonus of £1,000 if you save the maximum £4,000 a year.
- Help to buy ISA- gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
- Help to buy equity loan- gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
- Shared ownership- You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
- Armed forces help to buy- similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
- Rent to buy- This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
- Right to buy- allows you to buy your home at a discount price.
- Preserved right to buy- same as above.
- Right to acquire- same as above.
Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.
How much can you borrow with a default?
Most mortgage lenders will use an income multiple when looking to decide how much they may be able to borrow you for your mortgage with a default. You may find that the mortgage multiple on offer reduces due to you having a default. To have an increased mortgage multiple the mortgage lender may insist you put down a larger mortgage deposit and even with this, they may still offer you mortgage reates which aren't competitive.
If the default is the only blemish on your credit file then the mortgage multiple on offer maybe much better.
If you are a self-employed borrower with a default then you may find that the mortgage multiple on offer is even lower as self-employed borrowers will usually have their incomes scrutinized by the mortgage lender and not all mortgage lenders will accept 100% of a self-employed income for their mortgage affordability assessment.
How much you will be able to borrow with a default will heavily depend on your income and monthly disposable income. If you can prove that you can afford the monthly mortgage repayments comfortably with room for any financial emergencies then you will find that most mortgage lenders will increase how much you can borrow with a mortgage default and offer you an increased mortgage multiple.
If the default is more than 3 years old then it may be possible to borrow up to 4.5, maybe 5x income, but usually maximum income multiple is around 4x income.
Mortgage lenders that accept defaults
Different mortgage lenders will have their different criteria on the types or size of default they will accept but usually, you may be required to increase your mortgage deposit.
Mortgage lenders often change their lending criteria so it wouldn't be responsible to put a list of mortgage lenders that currently accept defaults as this list may change at any time.
Mortgage default FAQs
We have picked out and answered some of the most common mortgage default questions we see.
do you need to satisfy your default to get a mortgage?
No, you don't need to satisfy your default to get a mortgage but this will greatly limit the number of mortgage lenders who may be willing to lend to you.
If you have an unsatisfied default and you want to get a mortgage then you should speak to a specialist mortgage broker who may be able to assist you in getting a mortgage with an unsatisfied default.
You should remember that defaults stay on your credit file for 6 years and this may ruin your chances of getting a mortgage or other credit.
What is the maximum size of the default you can have?
Different mortgage lenders will have different maximum limits to the size of the default they may accept but usually, a default within the last 12 months will usually have a maximum limit of £1500.
After 12 months, most mortgage lenders will relax their maximum cap limits to varying amounts.
Why is a default registered in your credit file twice?
If a default is registered in your credit file twice then it is possible it has been sold on to a credit collection agency who has then marked the default on your credit file again.
In this case, the first default should be marked on your credit file as satisfied as this will indicate the chain of events to any third party.
If this isn't the case then you should get all your credit reports from the four credit bureaus including Crediva through Checkmyfile and see if this is the case on all your credit reports before reporting the error to each credit bureau.
The default flag on your credit report will last for 6 years after which it will vanish.
How long will a default stay on your credit file?
A default can stay on your credit file for as long as 6 years. It will be removed if you satisfy it within the first 14 days of receiving the default notice issued by the creditor or if the creditor gave a different timeline, then within that stated timeline.
Can you remortgage with defaults?
Yes, you may be able to remortgage with defaults but this will be based solely around what sort of defaults you had, how long the defaults are and what sort of equity you currently have in your property.
If you are considering getting a remortgage with a default you may want to speak with a mortgage broker who can analyse your situation and make the necessary recommendations.
How to get a mortgage with a default
If you need to get a mortgage with a default then your best bet may be to use a mortgage lender who lends to borrowers with bad credit.
Bad credit mortgage brokers will have a lot of experience in this part of the market and may be able to advise you on what mortgage lenders may be willing to offer you a mortgage with a default.