Many people fall behind with their mortgage or secured loan payments. This could be for various reasons such as losing a job, illness, relationship breakdown or any other change in circumstances. Arrears of a mortgage or a secured loan should be treated as a priority debt because if you do not pay, your lender can take you to court. This can lead to the loss of your home.
Many lenders charge penalties if you fall behind with your mortgage which means that the amount of arrears can quickly escalate out of control.
What's the difference between a first mortgage and a second mortgage or secured loan?
The first mortgage is the loan you took out to buy your home.
A second mortgage, also known as a secured loan, second charge or sometimes a consolidated loan plan, is a separate loan that is secured on your home.
Check all your loan agreements to see if they are "unsecured" or "secured" on your home. If they are "secured" this means the lender can ask a court to let it "repossess" your home. In other words, the court has the power to allow the lender to have your home if you do not keep up with your instalment payments.
If your home is repossessed it will be sold by the lender to pay off your debt. Sometimes the sale will be by auction, which means the price might not be as high as if you sold the property yourself. If there is any money left after the sale then you might be entitled to the balance. However, there will often be other costs to be paid out of the sale proceeds such as legal fees and auction costs.
Sometimes there is not enough from the sale to pay the full amount owed. This could leave you with an outstanding mortgage shortfall debt of several thousand pounds. However, because the house has already been sold, this debt is no longer a priority debt.
When should I contact my lender?
You should do this as soon as possible. Don't wait for your lender to get in touch with you, as this may not be for two or three months by which time the arrears will be increasing. Explain your difficulties to your lender. It is never too early or too late to come to an arrangement.
What payment arrangements will my lender accept?
You will usually have to pay your contractual monthly amount plus an extra amount each month to clear the debt (or the 'arrears'). The lenders will often ask for the arrears to be cleared over 12 to 24 months. But, they can also agree a longer period for you to pay, even, in some circumstances, up to the remaining years left on your mortgage.
To work out how much you can afford to pay you need to see how much money you have coming in and how much you need to live on each week or month. Use only the money that is left over to decide how much you can pay.
If you are receiving certain benefits you may be entitled to help with your mortgage and some secured loan payments
Don't forget to keep copies of all letters received from and sent to your lender. If you reach an agreement to repay the arrears make sure you have the agreement in writing.
If you cannot clear the arrears as quickly as your lender is asking you to, contact them and explain why not. Tell them if you are affected by particular circumstances, for example, if you or your partner has had a long illness, your partner has died or you have split up with them, or if either of you has lost your job. Sometimes, if you cannot afford to make the full payments, your mortgage company may accept reduced payments for a short period if you can show it is likely you can go back to the full payments in the future. Get advice from a Debt Adviser if you need help with this.
Remember, your offer needs to be realistic for you - be sure you can keep up with the repayments offered without getting into debt with something else.
If your home is worth far more than the amount outstanding on you mortgage, tell the lender. The more your home is worth, the less risk your lender is taking in giving you more time to clear your arrears by instalments.
Occasionally your lender may accept another payment arrangement, such as:
- Paying the interest only for a short time
- Adding the arrears to your total mortgage debt
- Increasing the mortgage term
If you think any of these might help you, contact a Debt Adviser for further advice.
How do I deal with my second mortgage / secured loan?
Companies offering secured loans or second mortgages are generally less tolerant of arrears. This is because they have fewer rights than your main lender to any money if your home is repossessed - the money owing on the first mortgage has to be paid back first. These lenders can apply a lot of pressure to get you to pay, and sometimes go to court very quickly after you miss a payment. This can make reaching agreements difficult.
If you are involved with lenders like this, try offering an extra amount on top of the normal payment to clear the arrears in 12 to 24 months. If you can't manage this, get advice from a Debt Adviser.
You may also be able to apply to the County Court to get your normal monthly payment reduced. This procedure is called a Time Order. Get advice from a Debt Adviser about this.
Occasionally a lender may add so much in interest and charges onto the arrears that once you are behind with payments it is very difficult to catch up. Even if you pay the amount due each month plus something towards the arrears, you might find that the debt is increasing. Ask your lender to freeze these additional charges as long as you make the agreed payments, and if they will not, get advice. This type of situation is not typical.
What if my lender refuses to negotiate?
If your lender refuses to negotiate or refuses to accept your reasonable offer, start paying what you can afford. This should be:
- the normal monthly mortgage payment, plus an amount off the arrears if possible.
This will help you if your case goes to court.
What if my lender takes me to court?
You have rights if you are taken to court but you should get help from an adviser as soon as possible.
If you are unable to see an adviser before the hearing you may be able to get help from the court rota scheme for mortgage repossessions (Manchester residents only).
Information on other websites
National Debtline
General information to help people in debt including dealing with mortgage shortfalls and a self-help debt pack.
Shelter
Information about mortgage arrears and mortgage repossession
Trading Standards
Information about re-mortgaging
Need more help? Live in Manchester? Send us an email
Information Provider:
Manchester Advice
Date Reviewed:
30 September 2008
This information is for guidance only and is not an authoritative statement on the law. Please read our Terms and Conditions.
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