Can You Pay for Your Mortgage with a Credit Card?
Written on 4 November 2019 by
You can pay for your mortgage with a credit card in certain circumstances, but borrowers rarely do it and it’s not something brokers recommend.
We understand that it may be the first idea that springs to mind when you’re a bit short for cash and can’t meet your mortgage payment one month, however it’s important you look at the other options available as you’ll probably find one that suits you better.
We explain when it’s possible to pay for a mortgage with a credit card, why it’s not a long term solution and what your other options are in this blog.
When Can You Pay for Your Mortgage with a Credit Card?
It’s usually only those who have found themselves in temporary, unforeseen financial difficulty that pay for their mortgage with a credit card – e.g. they’ve been made redundant.
They might use a credit card to maintain payment history with their lender if they can’t make their payment one month.
We must emphasise that this is a very short term solution, which is one of the main reasons people rarely do it – another reason is the hassle involved; you’ll likely have to call the lender and make the payment over the phone.
Why It Isn’t a Long Term Solution
Paying for a mortgage with a credit card isn’t a long term solution because:
- If someone uses a credit card to cover their mortgage payment, it’s quite likely they’re in serious financial difficulty which would be a problem for both them and the lender
- You typically make mortgage payments every month and even a single mortgage payment is a relatively large amount for a credit card, so you wouldn’t be able to do it many times before you hit your credit limit – e.g. a £200k repayment mortgage over 25 years with a 2% interest rate would have monthly payments of around £850. You could only make this payment on a credit card 4 times before it would likely be maxed out
Why Brokers Don’t Recommend It
Credit cards come with extremely high interest rates, many up to 30% per year. We don’t recommend paying for your mortgage with one as it could rapidly increase your unsecured debt and affect your credit worthiness to most lenders. This essentially means you might find it difficult to successfully apply for a mortgage all the while you have significant credit card debt. What’s more, it remains part of your credit history for 6 years – even if you pay it off.
You may want to ask your lender for a payment holiday. This is where, instead of making your monthly payment, it’s rolled up, i.e. added to your outstanding mortgage debt.
It’s worth noting that rolled up interest compounds which means that, because you’re adding your monthly payments onto your outstanding balance rather than actually paying them, the amount of interest charged increases as the outstanding mortgage balance is increasing.
A payment holiday won’t hurt your credit score, as long as you confirm with the lender that they won’t record it as mortgage payment arrears with credit reference agencies – otherwise you’ll have to contact the lender and have them talk to each credit reference agency so they can remove this from your credit file.
You go into mortgage arrears when you miss mortgage payments or have payments overdue from the past. We explain mortgage arrears in more detail a little later on in this post.
You won’t be eligible for a payment holiday if you go into arrears, so it’s worth speaking with your lender early. However, bear in mind they might not grant the payment holiday.
Convert Your Mortgage to Interest-Only
Another option is to see whether your lender can temporarily convert your mortgage to interest-only.
Converting your mortgage to interest-only won’t hurt your credit score but, because your mortgage will stop reducing - as you’ll no longer be making any capital payments towards the outstanding mortgage balance – it does mean you may have to make up those capital payments later on, to keep your mortgage to the original term.
Again, it’s worth bearing in mind that your lender might not agree to it. You should also ask your lender to explain all the terms and conditions they may have in agreeing a temporary switch to interest-only.
Converting to an interest-only mortgage can greatly reduce your monthly payments. For example, a £1,000 monthly payment could go down to approximately £400 on interest-only – depending on the loan size and interest rate at the time. Your outstanding mortgage debt would remain the same until you converted back to a repayment mortgage or paid off the debt in one ago at the end of the interest-only mortgage term.
Changing Mortgage Product
You might be able to simply transfer to a more affordable product with your lender if your introductory period is due to end on your current mortgage or you’re already on the lender’s SVR (Standard Variable Rate).
Find out more about different options in our guide on mortgage types.
ASU (Accident Sickness and Unemployment Insurance)
ASU policies are designed to pay an amount towards your mortgage payment should you be off work due to accident, sickness or redundancy.
If you already have an ASU policy, then it’s worth looking at the terms and conditions to see what you’re actually covered for and to decide whether you should submit a claim.
If you don’t have one of these policies and you want to be covered, then you should seek some advice as to the various providers out there.
You may also want to consider downsizing. This is where you sell your current home and pay off your existing mortgage, taking out a smaller mortgage on a more modest property or a property in a cheaper area.
Whether this is a viable option for you will depend on your circumstances and the equity you have in your property.
You need to speak to your lender and keep them updated if you’re in financial trouble and are looking to downsize. They might give you time to sell your property – typically up to 12 months.
It’s also a good idea to speak to your broker for advice on how to go about downsizing and what mortgages might be available to you.
SMI (Support for Mortgage Interest)
It’s possible that the Department of Social Security may cover your mortgage interest payments for a certain amount of time with SMI (Support for Mortgage Interest), if you already qualify for certain benefits.
Benefits that make you eligible for SMI include:
- Income Support
- Income-based Jobseeker’s Allowance
- Income-related Employed and Support Allowance
- Universal Credit
- Pension Credit
SMI is a loan. It can’t be used for your capital payments, any insurance policies or any missed mortgage payments, i.e. you can’t use it to cover any arrears. You have to repay it with interest when you sell or transfer ownership of your home.
It can take up to 39 weeks from the first time you claim a qualifying benefit before you receive any SMI payments. This means you risk falling into mortgage arrears while you wait for your SMI to begin. Lenders are aware of SMI so it’s worth talking to them as they may consider delaying any repossession proceedings. Remember that you can’t use SMI to cover any arrears – only mortgage interest payments.
For more information visit the GOV website.
You go into mortgage arrears as soon as you miss a mortgage payment. This is something you absolutely want to avoid if possible.
You would almost immediately become what’s known as a “subprime borrower” when you go into mortgage arrears.
Most lenders won’t lend to you once you’re classified as a subprime borrower as you’ve already shown you can’t maintain your payments on a previous mortgage. Only specialist lenders will consider lending to you and you’ll likely need a broker to help you find one as many only operate through intermediaries.
If you’re already in arrears, then it’s critical you speak to your lender immediately.
It may also be worth seeking help managing your finances. You can find advice and resources on the Citizen’s Advice Bureau website.
Tips for Staying on Top of Your Mortgage Payments
- Put up to 6 months mortgage payments aside in savings to prepare for this kind of situation
- If it looks like you could be made unemployed, search for a new job ASAP to avoid going into mortgage arrears
- Keep the lender updated
- Speak to your broker – we can help or direct you towards the help you need
Keeping Your Lender Updated
You must contact your lender if you’re in financial trouble in order to manage what could ultimately become a very upsetting repossession process.
Keeping them updated from the outset will make it easier on everyone and give you more opportunity – and possibly more time – to put alternative arrangements in place. This could save you and your family a significant amount of stress.
To talk to one of our brokers about your situation, call us on 03304 332 927 or send us an enquiry.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.