Talk to your lender as soon as possible. Let your lender know that you are taking steps to put things right, and put forward some proposals to clear the arrears.
Your lender is likely to be more sympathetic if you talk to them at an early stage rather than waiting until the arrears become unmanageable.
If you can afford your regular mortgage payment, but have arrears, keep paying your regular monthly installment and come to an arrangement to clear the arrears.
Use a budget sheet to work out if you can afford your normal payment, and what you can afford towards the arrears. See budgeting for reference.
Lenders may want you to pay the arrears in 12 or 24 months. Ask for a longer period if this is not convenient and start paying what you can afford, explaining why you are unable to pay more.
What is a reasonable period to pay?
If your home is worth more than your total mortgage, tell your lender. An important court of appeal case, Cheltenham & Gloucester v Norgan, says that in this situation, a reasonable time to pay back the arrears could be the whole lifetime of the mortgage.
A number of mortgages have the option of taking a payment holiday, although this is likely to be a rather short time, however, this option may only be available if you are up to date with your payments. Interest continues to accumulate during the payment holiday and will be added to the outstanding balance.
Most lenders will expect you to come up with a plan to clear up the arrears rather than making suggestions for you. You need to show you will be able to clear the arrears as well as keeping up regular repayments on your mortgage.
Capitalising the arrears
Normally you can only do this on your first mortgage, and usually only if there is quite a lot of equity in the property (the value of your home is significantly more than the outstanding mortgage). The arrears are added to your mortgage, their repayment is spread over the term of your mortgage. This will cause your mortgage payments and overall interest paid, to increase.
Increasing the mortgage term
Most mortgages are spread over 25 years. If you have already lived in your home for several years, you could ask your lender to extend the term back to a full 25 years, or even 30 years. This could cut your monthly payments. This might be helpful if your income has dropped, and you don’t think it will improve, and you need longer to pay back your mortgage. If you have arrears, increasing the term may mean you can afford to pay your new mortgage payment plus something towards the arrears.It may be more difficult to increase the mortgage term if you have an endowment mortgage. Ask your lender.
Switching to interest only payments
If you have a repayment mortgage, you could ask your lender to accept a monthly payment which covers only the interest part of your normal monthly payment. This will probably have to be a temporary arrangement and capital repayments will have to be resumed in the future. If you already have arrears, it is likely your lender will also expect you to pay something towards them each month.
Creditors will want reassurance the you will be able to resume making repayments towards the capital or that there will be other means to repay the capital in the future. If you have an endowment mortgage, your lender is only receiving interest payments to this course of action wouldn’t apply.
Some mortgages and secured loans include policies allowing interest only repayments for a period of time. It may be worth looking at the terms of your mortgage or loan.
If you are in receipt of benefits such as JSA or ESA and waiting to be able to apply for SMI (support for mortgage interest), your lender could be convinced to accept half the interest repayments until your SMI comes through.
Change to a repayment mortgage and cash in your endowment
If you have an endowment mortgage, you may be able to change this to a repayment mortgage for increased flexibility, for example, to extend the term of your mortgage or capitalise the arrears. Endowment mortgages include an insurance policy and, if you have had this policy for a few years, it may have a surrender value. The lump sum may be used to pay off the arrears
Ask your lender about this and get independent financial advice on:
There are also other companies in the market who will buy insurance policies at higher rates than the cash-in value insurers will pay you. If you decide to sell and the policy is ‘assigned’ to your mortgage company, you must ask them to release it before you can cash it in.
SMI is a payment made by the Department for Work and Pensions (DWP) to your lender, to help pay some of the interest on your mortgage. SMI is usually paid to people who are in receipt of certain benefits. If you or your partner is getting one of the following benefits, you may get SMI:
How to claim SMI
The Government’s Mortgage Rescue Scheme closed to new applicants in March 2014. Some local authorities and housing associations may run their own rescue schemes and it will be advisable to check with your local authority.
There are also privately run sale and rent-back schemes run by profit-making companies, that allow a homeowner to sell their home and remain in the property as a tenant. Up until 2010, thee schemes were unregulated and there were a number of cases of mis-selling, however, these companies are now regulated by the FCA.
If you opt for a sale and rent-back scheme, you should find out:
You should be aware of the following risks:
Selling your home is a major decision that should be made only after looking at all the alternatives. It is not advisable to sell your home merely to repay your debts, unless the home itself is at serious risk of being repossessed. In this case, selling it privately may result in a higher sale price than that paid by a rent back scheme and may avoid the shortfall that could result from a sale by the lender after repossession.
Selling in the open market may be applicable if:
- If you have a spare bedroom, you could consider getting a lodger in to increase your income, even if only while you get back on your feet. Some people even let out the bedroom and move into the living room.
- In certain circumstances, you could also consider moving into rented accommodation and letting out your home. This works best if you live in a large house and you and your family could move into a smaller one where the rent is lower than your mortgage payments.
- Certain properties in some areas can be turned into holiday lettings or short lets. Rents are much higher than long term lets and you decide when you want to move back.
- If all else fails, you may consider putting your house on the market as noted above. You will usually get a better price selling it yourself, than what the lender may sell it for if it was repossessed.