Debt Advice Handbook Scotland - 1st editionChapter 8: Housing debt3. Mortgage arrears Dealing with mortgage arrears
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Dealing with mortgage arrears
Negotiate with the lender
The first step is to contact the lender and try to negotiate some time so that you can see what their position is.
You can ask the lender to exercise forbearance as per the FCA guidelines.1FCA, Guidance for firms supporting their existing mortgage borrowers impacted by the rising cost of living FG23/2, 10 March 2023, available at fca.org.uk/publication/finalised-guidance/fg23-2.pdf
Most lenders are happy that you have become involved and are trying to sort the situation out.
The earlier you contact them the better. It is better to negotiate a settlement rather than rely on the courts.
Using guidance
Advisers should familiarise themselves with the FCA guidance about interest-only customers, mortgage prisoners and forbearance, the MCOB rules and other associated guidance (CONC). You can use this guidance to negotiate with the lender and ensure they comply with the rules.
 
1     FCA, Guidance for firms supporting their existing mortgage borrowers impacted by the rising cost of living FG23/2, 10 March 2023, available at fca.org.uk/publication/finalised-guidance/fg23-2.pdf  »
Check for insurances
A client may have a mortgage payment protection policy. This covers mortgage repayments if the client is sick or has an accident which means they cannot work or lose their job by being made redundant.
Different policies provide different levels of protection. Some cover either illness or unemployment, while others cover both.
Interest–only payments
A large proportion of secured borrowing is repaid by monthly payments that combine interest with a repayment of capital. In such cases, a client can reduce the payments if the creditor agrees to accept payment of only the interest without any capital repayment. Creditors need to be persuaded that a request to make interest-only payments is not just a delaying tactic or an excuse for being unable to pay anything. If a client can afford to pay the interest which is accruing on an agreement, you are not asking for anything that is out of the ordinary or generous.
Payments towards the capital can be resumed if the client’s financial circumstances improve in the future. Some creditors are prepared to wait until the property is sold for the capital to be repaid. Creditors must be satisfied either that the arrangement is temporary and the client will resume making the full contractual payments or that they will be able to repay the capital in some other way.
Paying interest only is appropriate if the client cannot afford to pay both the interest and capital. Some mortgages allow for a ’payment holiday’ of a couple of months. If this is not applicable and/or not appropriate, the lender might consider an interest-only arrangement as an alternative.
It cannot be used for endowment mortgages as the payments are already interest only.
Change from an endowment to a capital and interest mortgage
An endowment mortgage is a secured loan on which only interest is payable, accompanied by an endowment life assurance policy which is intended to pay off the capital borrowed either at the end of the agreed term or on the death of the borrower (whichever is the sooner).
For the borrower in debt, it is essential that the full amounts of both the endowment insurance payments and the interest on the loan itself are repaid on, or shortly after, the due date.
The creditor relies on the insurance company to repay the capital amount lent at the end of the loan period and, if payments to the insurance company stop, the creditor is likely to call in its loan on the basis that its security is at risk, unless an acceptable proposal for repayment of the capital at the end of the loan can be made. If, on the other hand, payments to the creditor are not kept up, the amount outstanding on the loan increases and is likely to become more than the amount that will be produced by the insurance policy at its maturity. Endowment mortgages are therefore less flexible than repayment ones.
To have the flexibility to capitalise arrears, extend the period of a loan or negotiate repayment of arrears over several years, an endowment mortgage needs to be changed to a repayment mortgage. The creditor does this automatically for some clients once the endowment premium is significantly in arrears.
However, to cease paying, surrendering or selling an endowment policy is a major financial decision and should not be taken without specialist advice from an independent financial adviser.
Reduced payments
A creditor can be asked to renegotiate the contract that has been made so that a client can afford the payments. There are three main ways in which payments can be reduced.
    •Ask the creditor to reduce interest/charges, either for a period of time (eg, the next year) or for the rest of the loan, even if interest has already been added to the amount payable over the whole period of the loan.
    •Ask the creditor to agree to reduce or write off the interest/charges that have already accrued on the loan so that the future payments are affordable by the client.
    •Ask the creditor to allow repayments to extend over a longer period, thereby reducing the capital portion of the repayments. There must be sufficient equity to allow this – the amount of equity can be calculated by deducting the total amount of all loans secured on the property from the market value of the property.
Capitalise the arrears
If a client’s mortgage arrears have built up, a lender can be asked to add the arrears to the total outstanding and for interest to be charged on the new capital amount. This can be included in the remaining period of the mortgage, or the repayment period may be extended as well. This is known as capitalising the arrears.
This strategy is useful when there is an improvement in the client’s circumstances following a period in which arrears have built up. For example, if a client has recently become employed after a period of unemployment or returned to work after a long period of sickness, provided their payment record was previously satisfactory, most creditors will agree to capitalise the arrears.
Creditors only normally capitalise arrears if the property’s market value is significantly greater than the amount of capital currently outstanding. They do not usually do so if it would lead to the capital outstanding being more than the value of the property.
Extend the mortgage period
If the client is several years into their mortgage, they could ask the lender to extend the mortgage term. This reduces the monthly payments. If the client has arrears, this may allow them to pay the new mortgage payment and something towards the arrears. They could also capitalise the arrears, as above, and extend the mortgage period.
Reduced payments or a payment holiday
The lender can be asked to renegotiate the mortgage so the client can afford the payments. They can be asked, for example, to charge a lower interest rate. This could be for a set period or the rest of the mortgage period. They can also agree to allow a payment holiday when the client is in a severe financial crisis.
Use pensions or other savings
If the client is over 55 and has a defined contribution pension, they could use some of their pension money to help pay the arrears. The client should also consider if they will need this money later in life. They may need to pay tax on some of the money they take from their pension, and it may also affect their benefits.
It is strongly advisable that clients considering accessing their pension pots should get advice from an independent financial adviser or contact Pension Wise.1moneyhelper.org.uk/en/pensions-and-retirement/pension-wise They can arrange for an appointment locally to discuss this (eg, at a local Citizens Advice bureau) or a phone or a face-to-face appointment.
 
1     moneyhelper.org.uk/en/pensions-and-retirement/pension-wise »
Homeowners’ support fund
The Homeowners’ Support Fund runs two schemes which can help clients at risk of losing their homes.1mygov.scot/home-owners-support-fund
    •Mortgage to Rent allows the house to be bought by a local council or housing association and carry out repairs to increase its rental value. The client can then stay in the home as a tenant paying rent to the new owners.
    •Mortgage to Shared Equity allows the government to purchase up to 30 per cent of the equity in the home, which reduces overall mortgage repayments. The client is still responsible for maintenance and repair and can remain in their home.
 
1     mygov.scot/home-owners-support-fund »
Handing back the keys (voluntary surrender)
If a client cannot pay their mortgage, they should not hand the keys back to their mortgage lender. This counts as voluntary repossession and should always be the last resort. If the lender asks the client to give up their keys, they do not have to do this. The lender must have a court order before the client can be evicted.
When handing back the keys, the client is still responsible for costs associated with the property (eg, council tax and utilities) until the property is sold.
Using the Debt Arrangement Scheme
The client can apply for a DPP even if they have mortgage arrears. This is only suitable if they can continue to make their regular mortgage payments, as the programme only covers the arrears, and the client must be able to pay ongoing mortgage costs.
Remember that while this can deal with the arrears, it does not automatically stop the sheriff from granting repossession at the same time. The client’s representative, or the client, must ask the sheriff not to grant repossession while the arrears are being paid. In this case, you could ask for a continuation or sist to buy the client time.
Using an insolvency option
Using insolvency is not an option for mortgage arrears as the inclusion of any debt owed does not stop the lender from repossessing the property.1s145(3)(f) B(S)A 2016
Insolvency can be a breach of the standard conditions in that if the client is insolvent, the lender can call up the security.2Sch 3(9) CFR(S)A 1970
 
1     s145(3)(f) B(S)A 2016 »
2     Sch 3(9) CFR(S)A 1970 »
Time order
The client can request the court to make a time order to reschedule the amount due over a longer period of time.
Time orders only apply to regulated mortgage contracts. They can only be granted if the court believes it is just to do so. See here for more information on time orders.
Recall the decree
If the client did not go to court for their court summons date and a repossession order was granted, they might be able to get the court’s decision recalled (allowing the case to be heard again). The client must lodge a minute for recall. They will require help from a solicitor, adviser or lay representative.
The minute of recall can be applied for at any time before the repossession and eviction are carried out.
Mortgage shortfalls
Mortgage shortfalls exist when a client’s home has been repossessed and sold but it does not make enough money to clear the debt. The lender is entitled to pursue the debt as an unsecured debt once court action has been taken. More information can be found in MCOB 12.4.1handbook.fca.org.uk/handbook/MCOB/12/4.html
As this is now a non-priority debt, it can be dealt with the same as other debts that the client may have, and a relative strategy is chosen for them.
 
1     handbook.fca.org.uk/handbook/MCOB/12/4.html »
The Mortgage Charter
Ninety per cent of all UK mortgage lenders have signed up to the UK government’s ’Mortgage Charter’. This is a joint piece of work from the government, the FCA and mortgage lenders.1assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1173386/Mortgage_Charter__1_.pdf
In short, lenders have agreed the following.
    •Anyone worried about their mortgage repayments can contact their lender for help and guidance, without any impact on their credit file and we would encourage you to contact your bank which is there to help.
    •Support for customers who are up to date with payments to switch to a new mortgage deal at the end of their existing fixed rate deal without another affordability check.
    •Lenders will provide well-timed information to help customers plan ahead should their current rate be due to end.
    •Lenders will offer tailored support for anyone struggling and deploy highly trained staff to help customers. This could mean extending their term to reduce their payments, offering a switch to interest-only payments, but also a range of other options like a temporary payment deferral or part interest-part repayment. The right option will depend on the customer’s circumstances.
Taken together with the FCA guidance, there should be some room for negotiation with lenders for clients having difficulty paying their mortgages.
 
1     assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1173386/Mortgage_Charter__1_.pdf  »
Complaints and the Financial Ombudsman Service
Complaints in the first instance must go through the lender’s complaints procedure.
If the client is not satisfied with the result, they can escalate it to the Financial Ombudsman Service (FOS) to investigate. Note that you can only go to FOS once you have received a final response from the financial institution you are complaining about or if they have not responded to your complaint within eight weeks. The FOS is free to use.1financial-ombudsman.org.uk/consumers
 
1     financial-ombudsman.org.uk/consumers »