Introduction to Mortgage Arrears
Introduction to Mortgage Arrears
If you cannot make payments on your mortgage over a period of time you are considered to be in arrears, lenders definitions of how long that period is vary. If you are in arrears then the lender is entitled to repossess your property because that is one of the conditions of any mortgage. In the best case your mortgage debt is paid off and you will have to make alternative housing arrangements. In the worst case you will still have to find another home and the sale of the property does not cover the debt, you are still liable for a portion of the value of the loan.
When are Mortgage Payments in Arrears?
The terms and conditions of your mortgage give the definitions of what the specific lender considers to be arrears. It is worth noting that any loan, not just a mortgage, that secured against the property may lead to repossession if payments are not met. Some mortgage lenders specify that three months consecutive missed payments constitute arrears whereas others specify a certain number during any 12 month term.
Other Issues with Arrears
There are some unpleasant consequences associated with being in arrears and specifically with having your home repossessed. Mortgage arrears and repossession will significantly adversely affect your credit rating. This, in turn, will affect your ability to get a mortgage in the future and will probably restrict the number of lenders you can approach that will consider you.
It is, without doubt, better to address the possibility of mortgage arrears as soon as possible because your financial situation can rapidly deteriorate if it is left too late. Lenders may give payment breaks or reductions in order to reduce the pressure and keep your business, however you will always have to pay back the missed or reduced payments.
Summary
- Mortgage arrears simply mean that mortgage payments have not been made when they were due;
- All lenders have slightly different terms and conditions for determining when a mortgage is considered to be in arrears;
- typically, after approximately six months of failed payments, you are at risk of repossession;
- arrears will also have a negative impact on your credit rating with the knock-on effect that you may be unable to obtain mortgages in future.
Introduction to Managing Arrears
If you are going to get into arrears or you think you might be about to do so then you need to start planning immediately. If you are already in arrears or that situation is imminent then you need to act as quickly as possible to mitigate the effects. There are a number of things that can be done and need to be planned.
Timing is Key
There are two main categories of debt, secured and unsecured. Unsecured loans usually have a higher interest rate because they are not linked to your property and if you default the lender gets nothing without taking legal action. Secured loans, like mortgages, are where you have put your property, or another asset, up as collateral for the loan and therefore if you default the lender may take that asset.
Most debt management advice says that as a priority you should pay the debts with the highest interest rates first. This is good advice where there are only unsecured debts, it will bring down payments to a more manageable level for the other debts. Where you have secured loans you stand to lose your home if you do not make the payments, the priority in this case should be to pay some or all of the mortgage payment and keep your home.
Pay as Much as Possible
You should try to pay as much as possible each month even if you are unable to make the full payment, the lender will be more receptive to coming to an arrangement if you do. This approach will also avoid arrears building up, these are never written off and will simply build up and make the situation worse.
Summary
- As soon as you are aware that you may be missing mortgage payments, arrange a meeting with your lender to discuss options;
- always prioritise your mortgage as this is a secured debt and you could lose your home if it is not paid;
- even if you cannot pay the entire amount, make sure you pay as much as possible to keep the value of your arrears to a minimum.
Introduction to the Mortgage Rescue Scheme
Mortgage Rescue Schemes offer a long-term solution to staying in your home if you cannot pay part or all of your mortgage. If the financial difficulty you face is a short-term one then you should try to come to an arrangement with the lender but as a longer term strategy Mortgage Rescue Schemes may be one answer.
Mortgage Rescue Scheme - An Overview
A Mortgage Rescue Scheme is where a local authority, housing association or in some cases a private lender buys your home and charges rent at a rate less than the mortgage.
Although you do not now own your home you may have money left over from paying off the mortgage and you will not have to move house.
More Details on Mortgage Rescue Schemes
There are also schemes where the property is not purchased outright, the buyer may have part ownership and you have part ownership. This arrangement will reduce your mortgage payments and involve a lower rent payment too. The combination of the two should still be lower than your existing mortgage payment.
In most schemes, it is possible for the individual to repurchase their property at a later date if their situation improves. Bear in mind, however, that any gain in the value of the property will have to be taken into account.
Eligibility for a Mortgage Rescue Scheme
Eligibility for these schemes is can be based on a number of different factors;
- Ability to make payments, even if they are small
- Minimal mortgage arrears
- Reduced income
- Necessity to remain in an area where no other accommodation is available
Summary
- If you are keen to stay in your current home but cannot make the monthly payments, a mortgage rescue scheme may be ideal;
- provided by housing associations and councils as well as some lenders, a mortgage rescue scheme allows the individual to sell their property but to carry on living there;
- strict eligibility criteria exist and anyone interested in this type of scheme should contact the relevant bodies to see if the scheme is available to them.
What is a Mortgage Shortfall
If the worst should happen and your home is repossessed the lender will re-sell the property. If then the revenue from the sale is less than the amount outstanding on the mortgage there is a mortgage shortfall. This can happen for a number of reasons but mainly either the value has decreased over the years or the lender accepts a low price for a quick sale. In the case of a mortgage shortfall the lender will try to reclaim the balance from the previous owners.
Dealing with a Claim for Shortfall
After October 2004 the Financial Services Authority mortgage rules made it law that lenders had to get the best price for a property. With this amendment to the mortgage rules there are a number of avenues open for disputing a claim of mortgage shortfall:
- The property was not sufficiently marketed
- The lender accepted a lower offer than necessary
- In the case of a vacant property it could have been let to offset the shortfall
Mortgage Indemnity Insurance
Many lenders will take out mortgage indemnity insurance covering the lender for any loss associated with the loan however it only covers the lenders not the borrowers and the terms of the outstanding debt become ambiguous. The insurance company may, having paid the lender, attempt to reclaim their loss from the borrower.
It is worth requesting all insurance details relating to your mortgage if you face a shortfall claim.
Summary
- A mortgage shortfall occurs when a lender sells a property to settle an unpaid mortgage but does not achieve a sale price that covers the entire value;
- a lender is under an obligation to achieve a best price for the property and you can dispute your shortfall charge if you feel that this has not been done;
- many lenders have indemnity policies (which the borrower pays for at the outset) and this may mean that your liability is reduced, so always ask in order to find out if any claims have been made.
Resources For Mortgage Arrears
There are a number of resources available for dealing with the complicated area or mortgage arrears:
Debt Advice
www.cccs.co.uk The Consumer Credit Counselling Service offers advice and support for free on a range of debt issues including mortgage arrears and repossession.
www.nationaldebtline.co.uk This mainly phone-based service offers free and impartial advice on debt and related issues.
Legal Advice
www.citizensadvice.org.uk The Citizens Advice Bureau offers information online as well as regular walk-in clinics to assist members of the public for free, on a range of housing, legal and financial issues.
www.clsdirect.org.uk Community Legal Service offers free advice and representation for those who cannot afford to pay for their own legal advice. This service is means tested but is free for those who qualify.
Regulatory Bodies
www.financial-ombudsman.org.uk The Financial Ombudsman deals with complaints against financial companies and offers practice guidelines for lenders in the mortgage industry.
www.fsa.gov.uk The Financial Services Authority (FSA) is a government body that oversees the regulation of the financial industry and produces standards that must be met by all companies involved in the industry.
www.cml.org.uk The Council of Mortgage Lenders (CML) deals exclusively with the mortgage industry offering advice and ensuring that standards of service are consistently met.
