Managing Mortgage Arrears Debt
7 steps to handle your mortgage arrears.
People get into difficulty with their mortgage payments more often than you might think. It’s the largest amount of money you’re likely to borrow in one single transaction. Which means it’s up there as one of the most expensive repayments. With this also looms one of the biggest risks: losing your house. We understand, your house isn’t just a roof over your head, or a bed to sleep in, it’s a home, a place that holds your family. It’s a genuine worry.
If you’re in arrears and struggling to keep up with your mortgage payments, frightened that you could lose your home, don’t be. Repossession of your property is the very last resort; in fact, the Financial Conduct Authority (FCA) has even set out guidelines to make sure. However, it is important to understand that mortgages are not like unsecured debts. When there is an asset attached to the debt - like a house - there is a risk that the asset may be taken from you, if your situation worsens.
We’re going to share seven steps with you, to make sure you have the information to handle your mortgage arrears confidently and without fear.
Step 1: Communicate with your lender.
No matter how worried or stressed you are, don’t bury your head in the sand and hope the mortgage lender will disappear. Keep the communication open with your lender. It might feel tempting to hide the letters down the back of the sofa but the best thing you can do is communicate with the lender and always in writing. If you are proactively communicating with your lender, the recovery actions they can take are limited.
Step 2: Lenders must be reasonable.
This one is less of an action or step and more of a need to know. If you’re genuinely unable to keep up with your monthly payments, the lender has a responsibility to try to work out a plan with you. This is why open lines of communication are so important. They have to work with you to agree a time period that you can pay off any arrears.
Let's say your mortgage is £500 per month and you have missed a month. The lender cannot expect a payment of £1000 the following month to make up for the missed payment. This would be unreasonable, unless you have communicated that you can afford to make both payments.
The lender must work with you to understand your financial situation before putting a payment plan in place. The lender must also give you a reasonable amount of time to consider any agreement before committing to it.
Step 3: Extend mortgage terms.
To help you get back on track with your mortgage payments, one of the first ports of call should be considering the option to extend your mortgage term.
Let’s say you have 20 years left on your mortgage, by extending it to 25 years, the monthly payments should be lower, which might make them more affordable for you. We would expect your lender to proactively discuss this option with you if you’re struggling to pay your mortgage but if not, make sure you ask them about it.
Step 4: Change mortgage type.
Extending the terms isn’t the only option. If you’re currently on a repayment mortgage it’s almost certain the monthly cost will be higher than an interest only mortgage.
With an interest only mortgage, you’re simply paying off the interest, not the money you originally borrowed. Raise the topic of switching to a different mortgage type with your lender, as this could offer some immediate breathing room that makes your mortgage more manageable.
Step 5: Deferring interest.
As opposed to switching to an interest only mortgage, you could negotiate with the lender, to “defer the payment of interest due”.
However, this is only a short term fix to reduce your mortgage payments, while you get back on your feet and work through your financial difficulties.
Step 6: Government schemes.
Outside of the options a lender has within their power, there is a government scheme designed to help both you and the lender. It’s called ‘Support For Mortgage Interest’ also known as SMI.
Through this scheme, the government helps with the interest payments, but only when you are really struggling. It’s one of the final steps to prevent you from losing your home and it isn’t a handout, but rather a loan which you will be charged interest on. The loan is then paid back at the point you sell your property.
The scheme really is for when you have no other options, and you’ve reached the end of the line. However, to find out more about eligibility for the scheme, visit https://www.gov.uk/support-for-mortgage-interest/eligibility
Step 7: Selling your property.
Finally, there is the option of selling your property to clear the mortgage.
The lender has to give you a reasonable amount of time to attempt to sell the property. You’ll have to notify the lender that you’re putting the property up for sale and that a realistic price has been set.
Where possible try to sell the property yourself the traditional way, don’t be in the hands of a lender auction, as the lender will be looking for a quick sale. In the best-case scenario the auctioned sale will clear your mortgage. However, in the worst-case scenario the sale won’t clear your mortgage leaving you with a remaining mortgage debt and no asset. This is called a shortfall.
That's a lot of info...
There’s a lot of information to take in here and this is just the simplified version. We want you to feel confident with actionable options that you can pursue if you are struggling with mortgage arrears. We don’t want to bombard you with technical information.
That being said here is a link to the FCA guidelines, we try to keep the information we provide as simple as possible but would always encourage you to do further research before you take action.
It really is important to communicate with your lender, retain the control and remain confident.
Don't forget to read The Real Debt Guy's final thoughts below!
The information in this article is considered to be true and correct at the date of publication.