This week I read in the papers that there’s a risk of increased repossessions in the UK, as mortgage costs are predicted to rise next month. Several lenders have already announced rate increases and others will probably follow.
Obviously mortgage is a priority debt and any arrears need to be sorted as soon as possible. In “Back to the Black” I felt I could do no better than quote what Citizens Advice say on the subject.
DEALING WITH PRIORITY DEBTS: mortgage arrears (source: Citizens Advice: see below for link)
If you are in mortgage arrears then your first priority must be to find a way to clear them. If not, your lender can take legal action to have you evicted.
However, if the lender knows that you are making a serious effort to sort out your debts, they might allow you more time. Once more, the key is early communication: don’t sweep the problem under the mat.
Reducing your costs
There are several options for cutting down your mortgage costs. Depending on the type of mortgage, you might be able to:
- switch from repayment to interest-only mortgage
- increase the term
- reduce your monthly interest payments
- shop around for a cheaper deal with another lender. However, you may have to pay charges for the switch and you’ll still have to pay off the arrears.
Sadly, none of these is entirely pain-free. Solving the short-term problem could either involve fees, in the case of changing lender, or it could increase your interest payments long-term. Consult an independent financial adviser first if you are thinking of taking any of these steps and, once again, consult the lender. They may be able to help; but only if you get in touch with them.
Paying off arrears
Before you do discuss paying off the arrears, you should first work out your discretionary income; see elsewhere in this book for how to do that.
You will also need to decide how to pay off those arrears. You may have several options for doing this:
- pay extra towards the arrears each month on top of your regular payments
- have the arrears added to your capital and paid back over the remaining term; this will, of course, increase your overall interest costs
- give up your endowment policy, if you still have one, or sell it to an investor, and use the lump sum towards your arrears; however, you will need to find another way to pay off the capital and you might also need to find alternative life insurance cover, so consult a financial adviser first.
Dealing with your lender
Once you have worked out a way of dealing with your mortgage arrears, write to your lender and set out your offer. It should be one which you can keep to and it should clear the arrears within the period of the mortgage. Include a financial statement showing how you have worked out the offer. If the lender resists at first, stress that an affordable offer is in both of your interests, because you are more likely to keep to it.
You should start to make regular payments against the arrears, even small ones. Even if your lender doesn’t accept the offer, it may help your case if you are ever taken to court.
If you haven’t been able to reach agreement on how to pay off your arrears, they will probably take you to court and try and get possession. However, the good news (if there is any good news in all this) is that, before they take you to court, they have to follow a fixed procedure called a protocol. This involves their taking a number of steps, such as discussing the reason for the arrears with you and giving you notice that they will start legal action if you have broken a payment agreement.
If you do go to court, the judge may allow you to stay in your property as long as you keep to an agreement to pay. The judge will take into account whether the mortgage lender followed the protocol. If you are in this situation, get help from an adviser.
If you can’t pay your arrears
If you aren’t able to clear your arrears, a court will probably give your lender permission to evict you from your home and your lender will sell the property. If they don’t make enough from the sale to cover the money you owe on your mortgage, you will have to pay the difference, which is called a shortfall.
If you can’t find any other way of clearing your arrears, it might be better to try and sell the property yourself, rather than wait to get evicted and let your mortgage lender sell it. This is because they are likely to get a lot less for it than you would, leaving you with a debt to pay. Properties which have been repossessed often sell for a lot less. Also, lenders often sell at auctions where sale prices tend to be lower.
Selling the property yourself and downsizing, or renting for a period, would give you a lump sum which you could use to pay off your mortgage; if you have enough left over, you may even be able to use it to pay off other debts.
Another option you may want to think about is a mortgage rescue scheme. These schemes are also known as buy back, sale and rent back or a sale and lease back scheme. These are schemes which offer to buy your property and rent it back to you. However, be very careful about signing up to a mortgage rescue scheme run by a private company. Not all these schemes are trustworthy and some companies will buy at below the market value. Schemes run by local authorities or housing associations are generally better, but there aren’t many of these.
Don’t be tempted to just leave the property and hand back the keys to your mortgage lender unless you’ve sold the property or there is a court order to evict you. You won’t gain anything because you will still be responsible for mortgage payments and buildings insurance until the property is sold, and will still have to make up any shortfall if the sale doesn’t make enough to cover what you owe.
If your lender asks you to give up the keys, you don’t have to do so unless they have a court order.
NOTE: This section on mortgage arrears has been based on an extract from the Citizens Advice organisation’s “Adviceguide” website. Readers who are in mortgage arrears should check that site for any changes to protocols.
WANT TO KNOW MORE?
Citizens Advice “adviceguide” website: LINK