The credit crunch and rising unemployment means more and more people are falling into arrears with their mortgage and are at risk from having their homes repossessed.
What happens if you fall behind with your mortgage?
When a mortgage is taken out, an agreement will be made between you and the lender as to how much should be paid back each month. If the borrower then falls behind on these repayments, they will be in what is commonly referred to as ‘arrears’.
No doubt the lender will be concerned about this and will contact the client about the situation. First of all, the lender will want to know if and why you are experiencing financial difficulty and will want the arrears to be cleared. If the client fails to do this, eventually the lender will issue court proceedings and seek repossession of your home. If a property is repossessed it means it now belongs to the bank and the client who was living there will be evicted.
Paul aged 23, bought a one-bedroom flat in Manchester two years ago. His mortgage payments are almost £800 a month. Paul ran into problems six months ago when he lost his job. He did not have any savings because he spent every spare penny buying the flat and decorating it. He told his mortgage lender about losing his job and they switched his mortgage to interest-only, so his payments dropped to about £500. But still, Paul had trouble paying even this amount and fell into arrears. He began to get increasingly worried when he was asked to call his lender immediately as he was expecting them to repossess his flat. However, banks should only repossess homes as a last resort and often prefer to come to some sort of an arrangement with the borrower. If their financial difficulties are only short-term, the borrower could negotiate with the lender to reduce monthly repayments. This, like Paul’s situation, could involve switching to an interest-only mortgage, or another way would be to extend the term of the mortgage.
Whatever the arrangement, the lender will want the arrears to be cleared as soon as possible.
When people fall into arrears it is important to keep communicating with the lender. Affordable monthly repayments should be worked out and an offer should be made to the mortgage lender. A debt advisor can help to do this.
It is essential to continue to make regular payments to the lender even if the borrower can not afford the full amount. However, if the amount paid is not enough, the lender may take the borrower to court. If a court date is set, the borrower must ensure that they turn up.
In some cases, the judge may allow a borrower in arrears to stay in their home as long as they are making some contribution to their repayments. The judge will investigate and take into account whether or not the lender has followed the correct rules and guidelines when they issued court proceedings against the borrower and also whether the borrower has continued to make payments on the mortgage.
Paul’s mortgage lender asked him what he could afford, and agreed he could pay £150 a month until he was back in employment.
When he started working again, he could afford his repayments. However, he remains in approximately £1,200 of arrears.
If the borrower is unable to pay off their arrears, the court will probably permit the lender to evict the borrower from their home, normally allowing 28 days to move out, after which bailiffs will visit and remove property.
The lender will then sell the property to pay back the money owed but he borrower and if they do not make enough from this, the borrower will have to pay the difference, known as the ’shortfall’.
