Paying your mortgage with a credit card

A recent survey from the housing charity Shelter has revealed that over 1m Brits have used their credit card at least once in the last twelve months to pay their mortgage or rent.

Even worse is the news that many people have done this by withdrawing cash on their credit cards. Not only are cash withdrawals punished by much higher interest rates than normal purchases, many cards charge over 25% pa, the interest starts clocking up the moment you take the money out.

Mortgage worries deepen

This survey is just one of many gloomy tales about the current state of the mortgage market. It has also been reported that more and more people are having their mortgage applications rejected as banks toughen up their lending practices in the wake of the recent credit crunch. As well as affecting homebuyers, this makes it harder for people coming out of old fixed-rate deals to remortgage and keep their costs down to a reasonable level.

Some mortgage lenders have even been withdrawing mortgage offers after homebuyers have exchanged contracts, putting their deposits at risks if they cannot find a replacement loan before they are due to complete their house purchase. Exchanging and completing on the same day is one way to avoid this problem, although this isn’t always possible.

The number of mortgage products available has also fallen by 40% over the last three months, according to Moneyfacts. Most of the decrease has been in sub-prime products, i.e. for those people who have had credit problems in the past, but it’s unusual to see such a rapid drop and across the boards mortgage lenders are certainly becoming more conservative in who they lend to and in what amounts.

What if you can’t pay the mortgage?

Although it’s worrying that so many people are using a credit card to pay their mortgages, at least they are paying them. Missing a mortgage payment will be reflected on your credit report and could make it harder to get credit in future, or mean you have to pay more to do so. And then there are the ubiquitous penalties charges….

Still, rather than using an expensive credit card, if you’re able to plan ahead and see that you’re facing a temporary shortfall then using an overdraft or a personal loan is likely to be a cheaper option. Alliance & Leicester is offering the cheapest overdraft at the moment and loan rates, although they have been rising in recent weeks, are still on offer for as low as 6.3% APR. In fact, bizarrely, many personal loans are available at a lower interest rate than standard variable rates on a mortgage.

If your payment difficulties look like they are more long term and you’re falling short month after month, then more drastic action is needed. In this instance, taking out more debt is the start of a slippery slope and likely to make the problem worse. Talk your mortgage lender as soon as possible and explain that you’re having problems. It’s also worth speaking to one of the free debt counselling services such as the CCCS or your local Citizen’s Advice centre. You could also try one of the following options:

If you’re using a repayment mortgage, then you could switch to an interest-only loan for a few years. This will reduce the amount you pay each month but at some stage you’ll need to start repaying the capital again. Nevertheless, this can be a useful medium-term solution. Lengthening your mortgage term has a similar effect, although you will end up paying more in interest over the long run.

Switching to a cheaper loan with the same lender is worth considering, if they allow you to do so. Interest rates look more likely to come down over the next year but it’s still worth looking for a fixed-rate deal so that you can be certain about your mortgage costs and plan accordingly.

More and more young people are getting joint mortgages these days and sharing with friends as a first step onto the housing ladder. Be aware in these situations that your mortgage lender can pursue any of you if repayments aren’t made. So even if you aren’t struggling with your part of the mortgage that doesn’t mean you’re in the clear.

Getting help with mortgage payments

There is some state help available for mortgage payments in the form of Income Support Mortgage Interest or ISMI. As the name implies this only covers the interest element of a mortgage. It’s also means tested and limited to the first £100,000 of any loan, so many people will find they aren’t eligible for it.

In addition, if you took your mortgage out after 2 October 1995 you won’t get any help for 39 weeks. People over 60 get help immediately though and certain other people such as carers can also get help more quickly. Those who took out their mortgage before 2 October 1995 get half their interest paid after 8 weeks and all of it after 26 weeks.

For most people, mortgage payment protection insurance is more likely to come to the rescue. This only pays out in the event of accident, sickness or unemployment (although not all policies cover all three situations) so it won’t help if you’re simply short of cash. It’s expensive if bought direct from a mortgage lender so scour the web for a stand-alone policy and you’ll get a cheaper price and money paid out as quickly as 30 days rather than the more usual 6 months.

Selling to rent back

Finally, a word of warning about the schemes that buy your house at a discount and then allow you to remain there as a tenant. They are currently unregulated and not only do you receive far, far less than you would normally get for selling your house, there are many tales of people being evicted not long after the deal is completed. Avoid like the plague!