Mortgage arrears

Repayments on your mortgage and other loans secured on your home are a priority because if you fall into arrears, your property can be repossessed and you may find yourself homeless. It is important to contact your lender as soon as you find yourself struggling to pay.
Dealing with mortgage arrears

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.

Don’t ignore phone calls or letters as this will only make matters worse. The longer the problem remains unresolved, the worse it’s likely to get. Your lender can take you to court to obtain a possession order.

Money houseYour 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.

Don’t be tempted to hand back the keys and walk away! If there is a shortfall after selling your home, you will be responsible for that shortfall. The council may also regard you as intentionally homeless and you will find it difficult to obtain a mortgage in the future.

Payment holidays

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.

Paying off the arrears

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.

  • Advantages
    • It clears the arrears and solves the immediate problem of repaying them
    • Avoids the stress and anxiety associated with being in arrears
    • The repayments are affordable as the arrears are spread over a long period of time rather than just a few months
    • The lender cannot take action
    • No impact on credit records.
  • Disadvantages
    • Increased monthly repayments for the life of the mortgage if the term remains the same
    • Life of the mortgage may be extended
    • Higher impact of interest rate rises due to increased capital
    • Decreases the equity in your home
    • Interest paid on the arrears for the life of the mortgage
    • Additional interest paid due to capitalisation not usually covered by SMI.

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:

  • whether it is a good idea to cash-in or sell your endowment policy; and
  • whether changing to a repayment mortgage will reduce your monthly payments.

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.

  • Advantages
    • Increased flexibility to capitalise arrears or extend term of the mortgage
    • Could save your home from repossession
    • Lump sum can be used to pay off arrears
    • Potential to reduce your monthly repayments
    • Avoids the stress and anxiety associated with being in arrears
    • No negative impact on credit records.
  • Disadvantages
    • The lender may charge a fee to convert the mortgage
    • Separate life insurance has to be arranged
    • Potential for losses when cashing in an endowment, particularly if it’s a recent policy
    • Lender may take the full surrender value of the policy.
It’s important to stick to any agreement you make to pay off the arrears. If you don’t keep your agreed payments, it will make it more difficult to negotiate with your lender in the future.
Support for Mortgage Interest (SMI)

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:

  • Income Support;
  • Income-based Jobseeker’s Allowance (JSA);
  • Income-based Employment and Support allowance (ESA); or
  • Pension Credit.
There is a waiting period before you can get SMI, currently 13 weeks. The previous waiting period was 39 weeks.
People over the age of 60 who are claiming pension credit, are entitled to help immediately without having to wait.
  • If you are receiving jobseeker’s allowance (JSA) and you claimed after 5 January 2009, you will only be able to claim support for mortgage interest for up to two years.
  • There is no time limit if you are receiving income support, pension credit or income-related employment and support allowance (ESA).
  • SMI is paid at a set rate, the actual rate of interest on your mortgage is not taken into account; this means SMI may not cover your interest in full. Actual rates are variable but over the past few years they have been just over 3%.
  • You can only get help with interest payments on loans up to £200,000 – £100,000 if you are receiving pension credit.
If you have made a claim for SMI, you should inform your lender. They shouldn’t take you to court if you have made a claim.

How to claim SMI

  • When you make a benefits claim, you will be asked for information about your housing situation. If you are already in receipt of benefits, you can claim support for mortgage interest at the Jobcentre.
  • You need to provide information about your financial situation and your lender will have to complete some of the forms confirming the details of your loan.
  • You can’t claim housing benefit to get help with your mortgage but you can still apply for council tax rebate.
  • If you own your home on a shared ownership basis, you may be able to get housing benefit to help pay the rent on the share you do not own.
Rescue Schemes

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.

To find out if a company is registered, you should look at the Financial Conduct Authority register.
Any type of rescue scheme should be considered as a last resort. The tenancies offered my not provide you with long-term security. Seek independent advice before making a decision.
Before option for a sale and rent-back scheme you should exhaust negotiations with your lender as well as looking at selling the property yourself at market rates.

If you opt for a sale and rent-back scheme, you should find out:

  • The type of tenancy you will have
  • The amount of rent payable
  • Any other payments you will be liable to make
  • What protection from eviction you will have
  • Whether you will have to pay for any of the legal and other costs associated with selling the property
  • Whether you can keep ownership of part of the property.
If you sell your home and are now paying rent on it, you should be able to claim housing benefit if you are eligible due to your income or being in receipt of other benefits such as JSA or ESA. The amount of benefit will be subject to your local housing allowance and bedroom entitlement.
To claim housing benefit, you will have to show that you wouldn’t have been able to carry on living in your home if you hadn’t sold it and there were no other alternatives.

Risks

You should be aware of the following risks:

  • You could be evicted at the end of the fixed term
  • You also risk eviction if you don’t pay the rent and any other charges associated with the tenancy
  • Your rent could be increased
  • You could lose money on the sale price of your home when compared against selling privately yourself
  • You may experience difficulties claiming benefits
  • You could lose your home if your landlord doesn’t pay their mortgage.
Selling your home

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:

  • You have somewhere else to live
  • There is considerably equity in the property
  • The property is too big or in the wrong area and you may want to move and buy something cheaper
  • Repossession is inevitable.
  • Advantages
    • Your lender and/or the court may give you time to sell your home instead of proceeding with possession action
    • You can achieve a better price than a lender selling a repossessed property
    • The mortgage will be repaid in full and this will be a plus point for the lender
    • It can save fees and costs
    • You can get more money than a sale and rent-back scheme could offer you
    • Capital will be released and could be used for other purposes
    • No impact on your credit records (unless you have other debts).
  • Disadvantages
    • You will have to move home with all the cost and disruption associated with it
    • Difficulty in finding a suitable place to live
    • You will need to find a buyer quickly in order to convince the lender and/or the court to stop possession action and this may lead to having to accept a lower price
    • You may lose money if the property is in negative equity or the market is not very good in your area
    • It may be difficult to get rehoused by a local authority if you are regarded as intentionally homeless.
Selling your home can affect your chances of being rehoused by your local council as well as affecting benefits.
There are a number of costs associated with selling your home, which should be taken into account when making a decision, such as agents and solicitors fees.
Useful tips
  1. house puzzleIf 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.
  2. 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.
  3. 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.
  4. 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.
Repossessed properties are often sold at auction for a very low price and lenders add on lots of fees and costs on top of the mortgage. This could result in a shortfall.
Having your home repossessed can affect your ability to obtain another mortgage in the future and make it difficult to rent a place to live.
Always deal with priority debts first. If funds are limited, non-priority creditors can wait!
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FACING EVICTION?

If you are facing eviction due to rent or mortgage arrears, you need to take action now.

Contact Shelter on 0808 800 4444.

Need legal help or advice? Contact us.
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