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What happens if you can’t make the payments on your mortgage?

What are the options if I'm struggling to pay my mortgage? Read this article to find out what your lender can do.
© Chartered Insurance Institute

Affordability is a key issue when a lender is deciding to lend you money. And a mortgage may be easily affordable when you start. But life happens and this may not always be the case. You may lose your job, get divorced or separated, become ill and be unable to work. Or worse – the main income provider may die. All these things could affect your ability to keep making the repayments on your mortgage.

A mortgage is a legal contract. If the borrower stops paying (for whatever reason) then in principle they are breaking that contract and the lender could take legal action against them.

However, first a lender may make sure they have done the following:

  • Made reasonable efforts to contact the customer (or their representative) in order to reach an agreement the customer can achieve. Such an agreement may be giving the customer a reasonable time in which to pay back the missed payments. Or the lender could agree to lengthen the term of the mortgage, so it is paid back over more years; or to defer interest payments for a while, or to add the missed payments onto the original loan.
  • If such an agreement can’t be reached, the lender should allow the borrower to still own the property so they can sell it and pay back the debt that way.
  • If all of this fails, then the lender will take over ownership of the property and sell it to get back what it is owed.

The next table looks at some of the things the borrower can do if they have fallen behind (ie are in arrears) with their mortgage repayments.

Overpay Agree to pay more than the usual monthly payment over a set number of months until the debt is cleared.
Freeze the arrears The lender may agree to let payments stop for a time while the borrower is temporarily unable to pay. This may be because they’ve lost their job, and expect to start another soon, or are off work through illness. Once the borrower is earning again, they can start paying again. They will pay extra each month until the debt is cleared.
Make interest only payments (only for capital repayment mortgages) This is not talking about changing the mortgage to an interest only one, but about agreeing with the lender that only the interest on the loan will be paid for a time. This would allow monthly payments to be reduced, especially during the later years of a mortgage, when most of the repayment amount is used to reduce the capital amount owed.
Capitalise the arrears This allows the borrower to add the amount of the missed payments to the loan as a lump sum. This is suitable for borrowers whose financial problems are only temporary.
Convert an interest only into a capital repayment mortgage A customer with an interest only mortgage could change it for a capital repayment one and use the repayment vehicle to clear the arrears. There are two problems with this approach. Firstly, monthly repayments on the mortgage are likely to go up – so affordability needs to be carefully thought about. Secondly, it is generally not advised to surrender a policy early, before it matures. For this reason the borrower should speak to a qualified adviser before doing so.
Sell the property This is the final option, if the borrower has no other way of paying back the arrears.
© Chartered Insurance Institute
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Introduction to Home Ownership and Mortgages

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