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Mortgage Arrears Guide

For homeowners, managing a mortgage can be difficult in times of financial hardship. If you have lost your job, or had a sudden change in circumstances, you can quickly fall behind in your mortgage payments and go into arrears.

This post will talk you through some of the causes of mortgage arrears and what you can do to get your mortgage back-on-track once more.

What are Mortgage Arrears?

If you have a mortgage and you are unable to make a monthly mortgage payment, for any reason, your mortgage will run into arrears.

With every mortgage payment, a percentage of the sum will be used to pay off the mortgage interest. Therefore, if you fail to pay the monthly instalment, the missing interest must be added to your mortgage loan, thus increasing the total amount of money you owe over the life of the mortgage. Once you have factored this is in, it is easy to see how falling into mortgage arrears can quickly ‘snowball’ and land you in dire financial straits.

What Happens if I Fall Behind on My Mortgage Payments?

Your lender has the right to take ownership of your property and sell it, if you default on your mortgage loan. There is a framework for this process set out in the Code of Conduct on Mortgage Arrears (CCMA).  There are steps you can take if you do fall behind with the Mortgage Arrears Resolution Process (MARP). The most important thing to do is notify your lender as soon as possible and together, plan on how you can catch up with your payments.

Please note: As well as catching up on the amount you owe in arrears, you will also have to ensure that you continue with your normal monthly mortgage payments.

Failure to keep up with your mortgage payments will lead to legal proceedings and your home may be repossessed.

How to Pay off your Mortgage Arrears

Depending on how far behind you are and the terms of your mortgage arrangement, you may be able to find a way to cut down your mortgage interest costs for a short time and make up the arrears. Some of the things you may be able to try include;

• Mortgage Protection Insurance – If you have taken out this insurance, make a claim.
• Reduce Interest - Asking to reduce the interest payments on your mortgage for a few months.
• Increase the Term - Increasing the term of your mortgage, so you have a longer period in which to pay back what you owe in arrears.
• Interest-Only - Suspend the capital portion of your mortgage for a while and make interest-only payments.
• Remortgage - You could switch to a cheaper deal with another lender. However, there will be fees associated with taking out a new mortgage and you will still have to pay back the money you owe in arrears.
• Capitalise Arrears -Add the money you owe to the mortgage capital (this is known as capitalising the arrears).
• Change/Sell Endowment Policy -If you have an endowment policy, you could sell this off, find another way to pay off your mortgage and take out another life insurance policy. Please seek advice before doing this, as changing an endowment mortgage is risky.
• Get a Loan - Pay off the arrears in one go with another loan. You will then have to make repayment at a higher rate of interest, however, your home will no longer be at risk of repossession.
• Tax Credit and Benefits – Check if you are entitled to help from the government in the form of welfare benefits or tax credits. There is also a scheme called Support for Mortgage Interest (SMI) where, upon acceptance to the scheme, the government will make interest payments directly to your lender on your behalf, to a maximum of £200,000 per mortgage loan.
• Let your Home – You will need permission in your mortgage contract to do this. But you could choose to rent out your home and use the money to pay off your arrears. You will also need to inform HMRC if you pay tax or Jobcentre Plus, if you are on benefits.
• Change your Utilities, Cancel Subscriptions – If you can save on your energy bills by switching, or adjust your other subscriptions and non-essential expenditures, you may be able to move the savings you make into paying off your arrears.
• Shared Ownership – If you own part of a shared ownership property, try talking to your housing association and see if they will agree to buy back a share of your home. But remember, your rent will increase if you choose this option.
• Mortgage Rescue Scheme – The government has a Mortgage Rescue Scheme (MRS) which may be able to help if you are eligible and own a house in England. Contact your local council to find out more, but the scheme basically offers a shared equity loan made by a housing association, using your home as security. Alternatively, they can buy the home and rent it back to you. You may be considered for the MRS if you have a dependent, are pregnant, have a long-term disability or are deemed an elderly or otherwise ‘vulnerable’ person.
• Private Mortgage Rescue Scheme – Private companies also offer a similar scheme, where a housing association will offer to buy your home and rent it back to you. The minimum length of tenancy for this will be five years. At the end of that period, or even during your tenancy, the company has the right to evict you. They can also purchase your home for less than its value in the marketplace. If you consider this, think carefully and find a company that is registered with the FCA.
• Sell your Home – If you wish to take this option, you will need your lender’s permission and if the house sale totals less than the cost of the loan and arrears, you will need to pay the shortfall.

See our Guide to Negative Equity for more information.

Please note: When you’re considering your options, you must think carefully about what you can afford, as the last thing you want to do is make your debt situation worse by overstretching your budget.

Step One – Notify your Lender

If you find your mortgage payments going into arrears, you must contact them as soon as possible to find a solution. Getting the advice of an independent financial advisor can help with this process.

Ignoring your lender’s calls and letters may incur extra charges, as they will continue to try to get in contact with you.

With any plan you propose, you may be asked to provide proof that this is a viable option. You may be asked to submit a Standard Financial Statement (SFS) consisting of;

• Accurate, up-to-date information of your monthly income and household expenses.
• Details of any current monthly debt payments, court payment orders, credit card statements etc..
• Details of your assets including any other properties you own as well as non-property assets, such as shares, savings etc...

Once this information has been collected, the lender will review your case and advise you on your new payment arrangement.

Step Two – Keep Making Mortgage Payments

 In the meantime, while your case is being reviewed, keep up with your mortgage payments with as much money as you can realistically afford. Regardless if your lender agrees to your plan, paying in small amounts anyway will work in your favour.

Step Three – Lenders Should Help Your Cause

When negotiating with your mortgage provider, they should do what they can to negotiate with you and resolve the mortgage arrears situation. They should reconsider summoning you to court if you have done any of the following:

• Taken steps to sell your house.
• Made a claim for mortgage interest support.
• Made a Mortgage Payment Protection claim.

Step Four – Court Proceedings

If you cannot come to an agreement with your lender, you may be taken to court for the arrears or for repossession of your home, or both. You cannot be forcibly removed from your home without a court order (if it is your main residence).

For this, you will get a ‘Claim Form’ from your county court, outlining exactly how much money your lender wants from you. The court will then send you a ‘Defence Form’ which you must fill out and return within 14 days. You must appear at the court hearing, or make steps to rectify your situation with the lender, before your court summons date. Most lenders would rather negotiate before it comes to this stage, so it is advisable to meet their demands, as far as possible, to avoid a court outcome.

If court is unavoidable, you will need to seek legal aid with a solicitor, or check if you are eligible for publicly funded legal support.

Step Five – Possible Court Outcomes

If your case is heard in county court, one of the following outcomes can be ruled;

• Dismissal – Where the arrears have been paid in full and the case is dismissed.
• Suspended/Postponed Possession Order – Where you can keep living in your home if you make mortgage payments. The possession order will come into play if you do not keep up with the mortgage payments, as ruled.
• Procedural Adjournment – This may be the case if the lender has not followed ‘pre-action protocol’ and allowed you time for any support or insurance claims to come in.
• Adjournment- You will be given time to pay off your arrears.
• Case Management Directions – This is where instructions are given on how the claim must be conducted for the county court judgement to proceed. This is common in cases where the borrower has adequate defence, e.g. the lender has made a mistake and the claim against the borrower is incorrect.
• Possession Order – Your home has been repossessed and you must leave the property by a certain date.
• Money Judgement – If the arrears are for a small amount of money or the claim is being disputed, you may be ordered to pay the lender the sum.

You may be charged by the lender to cover the costs of them sending you to court. If there has been a mistake in your case, which is the fault of the lender, you may be able to avoid paying the costs.

Step Six – Repossession of Your Property

Seek legal advice if you feel your case was handled incorrectly, as there may be the chance to appeal the ruling. You can also apply for an order to be varied, suspended or set aside if your circumstances have significantly changed (for instance, you may have inherited a large sum of money and can pay off the arrears).

Alternatively, you can apply for a Stay of the Warrant for Eviction. This is where you apply to remain in your home whilst you appeal your court order.

If it comes to your home being sold, and it sells for more than the cost of the loan (including interest on arrears), then you will receive the difference. Similarly, if there is a shortfall from the sale, you will need to make up the difference.

Please remember, your lender will only repossess your home as a final resort. If you do all you can to pay back the arrears, as well as seek legal advice, you should be able to avoid losing your home.