Repossession And Arrears
Falling behind on your mortgage repayments
If you have a mortgage, you should make repaying it one of your highest financial priorities because failing to do so can eventually lead to repossession of your home.
If you fail to make your monthly repayments, you will fall into what is known as mortgage arrears. Mortgage arrears will damage your credit rating, which can affect future borrowing.
Mortgage arrears can occur as a result of reasons outside of a borrower's control. In certain circumstances, such as becoming unemployed, mortgage payment protection insurance will cover your repayments - for this reason, it can be worth taking out this cover when you get your mortgage.
If payments are missed, you may find that penalty fees are charged, which can add to the problem. As with any financial difficulty, communication is key; don't just stick your head in the sand, contact your lender if it looks as though you are going to have a problem.
Believe it or not, it's in a lender's interest to help borrowers out of repayment difficulty and they also have a code of conduct which they are obliged to follow, meaning they should consider your case and treat you fairly.
If you miss your mortgage repayments and fall into arrears of several months, you risk having your home repossessed by the lender unless you can show how you plan to make up the arrears.
While times are tough, repossessions are becoming more common especially among those who borrowed up to the maximum allowed at the time. Fortunately, low interest rates have meant that fewer homeowners have been repossessed than expected.
However, repossession is a last resort for mortgage lenders and the majority of mortgage arrears do not end up in repossession. The bank or building society which lent you the money will first try to come to an agreement to pay off at least some of the arrears, as well as keeping up with your monthly repayments.
The lender may ask you to complete a budget outline of your household income and spending before coming to an agreement on how much you should pay off the arrears each month. This is a negotiation, so if the figure is too high make a counter offer. Once you agree, you must try to stick to it otherwise the lender - which will already be worried - may not be as sympathetic next time.
Ways to cope with arrears
You could ask for a payment holiday. Some mortgages come with this facility; others may agree to let you off a few months' payments while you recover from an unexpectedly large expense or after you've lost your job to allow you time to find another one. But remember that all the time you make no payments, interest is being added to your mortgage.
Another option is to ask your lender to move you to an interest-only mortgage for a time if you're on a repayment mortgage. Your monthly payments will fall dramatically allowing you to use the amount saved to pay off your arrears.
EXAMPLE – Moving to an interest only mortgage
You have a mortgage of £180,000, with the interest rate set at 4.5%. You have 15 years still remaining on the loan.
On a capital and interest arrangement, your repayments are costing £1,377 per month.
If your lender agreed to move you to an interest-only setup, your repayments would fall to £675, saving you £702 a month or £8,424 over a year.
But they don't have to let you do this and the Financial Services Authority has clamped down hard on interest-only mortgages. Your chances of being able to do this will be slim if the amount you owe is close to the limit of the value of your property. Do move back onto a repayment mortgage as soon as possible because you're not paying anything off the original loan during this time. And once your mortgage term ends, you will have to pay back the full amount you owe.
Another way to reduce your monthly payments is to extend the number of years to repay your mortgage. Do remember that the longer your mortgage term, the more you will pay back in interest over this time.
EXAMPLE: Extending the term of your mortgage
You have a mortgage of £180,000, with the interest rate set at 4.5%. You have 15 years still remaining on the loan and your repayments are £1,377 a month.
Your lender agrees to extend repayment term to 25 years
On a capital and interest arrangement, your repayments will drop to £1,000 per month, saving you £377 a month or £4,524 over a year.
Bear in mind that on an interest-only setup, your repayments would be £675 both on a 25-year term and 15-year term.
When your loan falls more than two months into arrears, the lender has the right to seek repossession. However, usually at this point lenders pass the borrower to their debt recovery service, which may be their in-house department or an outside agency which will try to agree a plan of action with the aim of avoiding court and repossession.
Typically, six months of arrears could result in a lender issuing a court action, but this varies between lenders. Before starting a claim for possession, your lender must go through a checklist known as the pre-action protocol.
It includes giving you all the information about your arrears, discussing your proposals to repay them and, if your suggestions are turned down, giving you their reasons in writing. The lender should also tell you to contact your council housing department and an independent debt counsellor for advice.
Legal action should be postponed if you are complaining to the Financial Ombudsman Service (FOS) or are claiming on your mortgage payment protection insurance (MPPI) or for mortgage interest support. Alternatively, if you're trying to sell your home you should be given more time.
If you come to an agreement on repayment with your lender and fail to keep it, your lender must give you 15 working days' notice in writing before starting a claim for possession. The court will write to you with a date for the hearing. You must reply to the court and you should take independent advice immediately. Shelter has a directory of local face-to-face advice services.
At the hearing, the lender puts forward a claim for possession and you can tell the judge about your circumstances. If you can show that you are able to pay monthly instalments to reduce the arrears, the court will usually issue a suspended possession order and you can stay in your home.
If an Order of Possession is made or you can't meet the payments on a suspended possession order, the lender will apply for a bailiff's warrant to attend and evict you. You have a final recourse of appeal if you are selling your house at a reasonable price. In this case, the possession warrant can be suspended.
Note that repossession won't solve your financial problems - even after you lose your home, you will still be liable for the mortgage until your home has been sold or any shortfall repaid.
For those in mortgage arrears, free and independent advice is available from Citizens Advice, the National Debtline, and the Consumer Credit Counselling Service (CCCS).
- You can only be evicted from your home if there is a legal reason for throwing you out
- Repossession is only allowed where the correct procedure is followed
- Repossession is a last resort
It is not in a lender's best interest to repossess your home – work with them to find a solution to your problems