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Mortgage arrears – and how to deal with them

2 June 2008

When it comes to mortgages, there’s a big difference between mortgage debt and mortgage arrears.

Mortgage Debt: Anyone with a mortgage owes money to the lender. That’s how mortgages work: you borrow money to buy the property, then repay it over (often) 20-30 years. As long as you can afford the repayments, this isn’t a problem. It’s very similar to paying rent – except one day, there’ll be nothing more to pay…

Mortgage Arrears: Arrears are money you should have paid by now but haven’t. This could be because of a short-term cash flow problem, or because you’re over-committed and living beyond your means. You can be sure your lender will want to know which is the case – and what you’re planning to do about it.

I’m in arrears on my mortgage – what do I do?
If you don’t pay your mortgage, you could end up losing your home, so you should make this your #1 priority. But whatever you do, don’t panic. You should be able to avoid repossession, as long as you act in time.

First of all, it’s important to understand why you’re in arrears. Is it because you’re spending too much on non-essential items?

Is it because payments to your ‘non-priority’ debts (credit cards, store cards, overdrafts, etc.) are taking up too much of your income? If necessary, you may have to talk to your non-priority creditors and explain that you’re having financial problems and need to focus on your mortgage payments. They might be able to help. Click here for more on this

If it’s because your monthly mortgage payments are simply too big, you may be able to remortgage your home. You could seriously reduce your mortgage payments by extending the term of your mortgage, spreading your repayments out over a longer period of time. Of course, you’d be paying interest for longer, so this could end up costing you more in the long run.

Talk to your lender
When you contact your mortgage lender, explain why you’re in arrears. If you can show that you’re doing your best (e.g. cutting back on your expenses, earning extra money and / or negotiating with your non-priority creditors) you might be surprised at how much they can do to help you. For example, they may agree to accept reduced payments for a while, or offer you a short ‘payment holiday’ (a period in which you make no payments at all), depending on the type of mortgage you have.

Debt solutions
If your non-priority debts are the problem, you might consider a debt solution that could help you reduce your monthly payments to them:

• Join a debt management plan. Ask a debt management company to renegotiate your repayments to your non-priority creditors, freeing up extra money for your mortgage.
• Consolidate your debts. Pay off your non-priority debts with a single large loan and you could agree to pay it back over a longer time period (and perhaps at a lower interest rate), reducing your monthly payments.
• Enter an IVA (Individual Voluntary Arrangement). This is an agreement with your non-priority creditors. You’d agree to pay a fixed monthly amount (normally for 5 years) that leaves you with enough to pay your mortgage and other essential bills. You would also agree to release any equity in your property. At the end of the IVA, your outstanding unsecured debt would be written off

When you talk to your lender, provide whatever proof (payslips, agreements, legal papers, etc.) you need to show that you’re sorting your finances out.

What if I can’t pay?
If the lender doesn’t think you’ll be able to pay the arrears you owe (in a reasonable timeframe) and keep up with your ongoing mortgage payments, they may suggest you sell your property. If you can’t agree on this, they may decide they have to start repossession proceedings.

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