AVOIDING REPOSSESSION: dealing with mortgage arrears

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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.

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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

 

 

 

 

 

 

DEBT AND THE IMPORTANCE OF MINDSET: CONCLUSION

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AND FINALLY …

A summary of the last six (what, six?) posts on this topic .

  •       Our thoughts influence our behaviour, which influences our results.
  •       It’s vitally important to stay positive when facing a debt crisis.
  •       Act as if you’ll be able to work your way out of this – and act this way consistently and persistently – and your behaviour will influence your creditors.
  •       Henry Ford: “If you think you can, or you think you can’t, you’re probably right.”
  •        “The Harvard Experiment”: the students were chosen at random, so were the teachers. The improved results were achieved because the teachers believed the children were more gifted than average.
  •        The traveller at the gate: “I think you’ll find they are the same here.”
  •        To minimise stress: create a clear positive picture of the result you want. Then keep it in the forefront of your mind.
  •        Create your own space: Seve Ballesteros and the bubble. Eliminate the negative influences of other people’s thoughts.
  •        Conduct all negotiations in writing. Avoid discussing on the phone: if you must answer it, simply note what is said, refer to previous correspondence, if any, and then respond … but in writing, not on the phone.
  •        Beware: letters apparently from “solicitors” and “debt collection companies” are sometimes really from the creditor. A neat tactic to put extra pressure on you without their going to the trouble and cost of involving third parties.
  •        Harassing debtors is illegal. If it happens to you, get help immediately. You can make a complaint to Trading Standards (via Consumer Direct, 08454 04 05 06), to the police if the harassment is severe or, if it is your landlord demanding money, your local council.
  •        Rules for correspondence: Prompt (replying). Polite, Professional & Persistent. (“If at first you don’t succeed, try, try and try again”)

 

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The above is the concluding extract from Chapter 2 (“Mind Over Matter”) of “Back to the Black: how to become debt-free and stay that way”. [LINK]

 

DEBT AND THE IMPORTANCE OF MINDSET, #6

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Previously, on this blog …

I urge you not to conduct a negotiation on the phone. Simply take in what is said and offer to think it over and reply – but in writing.

Always respond both to written correspondence and to phone messages and do so Promptly, Politely, Professionally – and Persistently (i.e. sticking to your guns). In the resources section at the end of my book (see below for link) there are some examples of letter formats you could customise to your situation.

NOW READ ON …

Harassment

It is illegal for creditors to harass debtors. The following official definitions of harassment are taken from the website of the UK’s Office of Fair Trading.

 Physical/psychological harassment: putting pressure on debtors or third parties is considered to be oppressive. Examples of unfair practices are as follows:

  • contacting debtors at unreasonable times and at unreasonable intervals
  • pressurising debtors to sell property, to raise funds by further borrowing or to extend their borrowing
  • using more than one debt collection business at the same time resulting in repetitive and/or frequent contact by different parties
  • not ensuring that an adequate history of the debt is passed on as appropriate resulting in repetitive and/or frequent contact by different parties
  • not informing the debtor when their case has been passed on to a different debt collector
  • pressurising debtors to pay in full, in unreasonably large instalments, or to increase payments when they are unable to do so
  • making threatening statements or gestures or taking actions which suggest harm to debtors
  • ignoring and/or disregarding claims that debts have been settled or are disputed and continuing to make unjustified demands for payment
  • disclosing or threatening to disclose debt details to third parties unless legally entitled to do so
  • acting in a way likely to be publicly embarrassing to the debtor either deliberately or through lack of care, for example, by not putting correspondence in a sealed envelope and putting it through a letterbox, thereby running the risk that it could be read by third parties.

 Source: OFT (Office of Fair Trading, UK) website, “Debt collection guidance: final guidance on unfair business practices.”

 

(However, I know from my own experience that many of the practices referred to above are used by many creditors.)

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To be concluded in my next post …

The above is an extract from Chapter 2 (“Mind Over Matter”) of “Back to the Black: how to become debt-free and stay that way”. [LINK]

 

DEBT AND THE IMPORTANCE OF MINDSET, #5

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Previously, on this blog …

“Let the answering machine take the strain”.

Follow this strategy (negotiating only in writing), summon up your reserves of patience and persistence, and the huge benefit is that you avoid verbal discussions. They are just too stressful right now and, thanks to that wonderful invention the telephone answering machine, you need never speak to a creditor in person.

NOW READ ON …

When I say this, I am not advocating that you ignore telephone calls. No, you should respond if a creditor leaves a message but you do it in writing, referring to any previous correspondence and repeating your previous offer, if you have made one, or perhaps making an offer, if you have not done so. Alternatively you could simply state your position and ask for their understanding and for more time.

One slight disadvantage of the telephone “bubble” concept (Seve Ballesteros again – see my last post on this subject) could be that your friends might notice that you are never in, even when they expected you to be so. Is that a major problem? Probably not. If you have an actual answering machine, rather than the service from your telephone provider, then you can use it to filter your calls, by listening to the machine before deciding whether to pick up. If you have “caller display” on your home phone, or you are being called on a mobile, problem solved: you can be 100% selective about which calls you accept and which you allow to go through to voicemail.

Now I do recognise that there are some people who simply cannot resist answering a ringing phone. If you are one of those people and you can’t break the habit, then all I can say is that I hope you are someone who is not stressed out by this kind of situation, in which case you are in the lucky minority. In such a case, carry on following your instincts and answer the phone, but I would still urge you not to conduct a negotiation on the phone. Simply take in what is said and offer to think it over and reply – but in writing.

Always respond both to written correspondence and to phone messages and do so Promptly, Politely, Professionally – and Persistently (i.e. sticking to your guns). In the resources section at the end of my book (see link below) there are some examples of letter formats you could customise to your situation.

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To be continued …

The above is an extract from Chapter 2 (“Mind Over Matter”) of “Back to the Black: how to become debt-free and stay that way”. [LINK]