What is a mortgage default and how does it affect your mortgage?

Mortgage defaults occur when you fail to make a series of repayments on your mortgage. Not only can this have a severe impact on your credit rating and limit your potential to borrow in the future, but, in a worst-case scenario, it could cost you your home.

Rebecca Goodman Published on 16 July 2021.
What is a mortgage default and how does it affect your mortgage?

Missing mortgage repayments and getting demanding letters from your lender can be frightening, particularly if you have family that you are responsible for too.

However, as worrying as a mortgage default might be, you can be reassured that how you respond to the situation will influence the effect of a default. The sooner you can sort things out, the lower the chances of it causing you long-term problems.

Here we look at what you need to know about mortgage defaults and the steps you can take to regain control of your situation and keep your home safe.

What is a default on a mortgage?

As soon as you miss or make a reduced payment on your mortgage, you risk causing damage to your credit profile. Once this happens, your options begin to become more difficult. If you believe you will not be able to make a mortgage payment, your best action is to contact your mortgage provider in advance.

Before your mortgage goes into default, you will first be sent a default notice by your lender. This usually happens if you have missed or made reduced repayments for a period of three to six months.

You can think of a default notice as an alarm bell or red flag. You should already be talking to your lender at this stage but if you haven’t, now is the time to make that call.

The notice will give you two weeks to catch up with your repayments. If you manage to do this everything returns to normal, but your credit profile will show late or missed mortgage payments. However, if you can’t, your account will officially go into default.

At this point your lender can take action to get its money back. This may involve your lender taking you to court and could result in it repossessing your home.

How does a default affect your mortgage?

If you have a mortgage and you think you will or you have already defaulted on a payment, it’s important to act as soon as you can, to rectify the situation.

This means contacting your mortgage lender immediately and being open and honest about why you are struggling. Once they have a better understanding of your circumstances and can see that you are working to tackle your problems, they are more likely to be flexible.

In some cases, you may be able to come up with an alternative agreement with your lender. This could include mortgage payment holidays or reducing your repayments to a more manageable amount for a limited time. You might be able to extend the term of your mortgage to reduce your monthly repayments or temporarily switch to interest-only. You may also be able to switch to a cheaper mortgage.

This can be a difficult process and some lenders may be more willing to help than others, for these reasons it is worth getting advice from a free debt advice charity. Citizens Advice is also a helpful resource and its website has lots of tips on how to work with your lender.

If you continue to struggle with repayments, lenders will inevitably start legal action which could ultimately cost you your home. However, it’s important to note this is considered a last resort for lenders after previous attempts to tackle arrears have failed and they must consider all reasonable requests to amend your repayment schedule.

Even if you do end up in court, it doesn't necessarily mean you will lose your home either. The court may agree to a suspended possession order, for example, if you can agree to a new repayment plan. Alternatively, if you feel you haven’t been treated fairly and would like to make a complaint to the Financial Ombudsman Service, or if more information is required, the court may adjourn the case.

A default will remain on credit history for six years. This means that future lenders will see the default whenever you apply for credit, which will lower your chances of being approved for future borrowing.

How to get a mortgage after a default

A default stays on your credit history for six years from the month you stop making repayments on the debt.

As soon as the default is marked, your credit score will drop. But once it’s been paid off, and is eventually removed from your credit history, your score will slowly improve.

Once you’ve repaid the debt, the default is marked as ‘satisfied’ on your credit report, making a better impression on lenders. You can also ask one of the credit reference agencies to add a note to your credit report to explain why the default happened, such as if you lost your job or you were unwell.

However, there are ways to improve your chances of getting a mortgage.

Good money management, making all your repayments on time, paying off more than the minimum amount required, and keeping a close eye on your credit report to make sure everything is correct can all help you rebuild your credit history and make your profile more appealing to lenders over time.

» MORE: Quick ways to improve your credit score

Can you get a mortgage with a default?

It may be possible to get a mortgage with a default, but a lender could require a bigger deposit or it may charge you a higher interest rate than a borrower without a default.

The more recent the default, the more impact it has on your credit score and the harder it will be to get another mortgage and you must be prepared that it might not be possible at all.

Therefore, it’s worth weighing up all your options when thinking about taking on a new mortgage. Over time, the impact of a default will lessen, so if you can wait you may be able to get a cheaper mortgage, or one with a smaller deposit, after a few years.

» MORE: What to know about bad credit mortgages

How can I get a default removed from my credit report?

It’s possible to ask for a default to be removed from your credit history under certain circumstances. If you believe the default is inaccurate, you can ask a credit reference agency to update or remove it.

There are certain steps you need to follow to do this, as outlined here.

  1. Contact the credit reference agency and ask it how and why the default should be changed or removed.
  2. It will then contact the lender to verify your account, and during this time, the agency will add a notice of correction to your report for other lenders to see to let them know that it could be inaccurate.
  3. You’ll be told how your lender has responded to your request - it cannot be removed or changed without the lender’s permission.

Image source: Getty Images

About the author:

Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent. Read more

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