Mortgage arrears

As soon as the mortgagor falls into arrears, they should immediately take steps to discuss their mortgage arrears with their mortgage lender. This way, the mortgagor may be able to arrange a new payment plan with their lender. If monthly payments are generally too high, extending the mortgage over a longer period may be possible to reduce payments - or even switch to an interest-only mortgage. If the arrears were caused by a temporary financial issue, there may be an option to take a 'repayment holiday' for several months (although this will increase the length of the mortgage).

In terms of repayment of arrears, it is sometimes possible to add these to the overall mortgage, so that repayment of this debt takes place over the entire lifetime of the mortgage. This method is known as 'capitalising arrears'.

Mortgagors on qualifying benefits (eg income support) may be able to get help with the interest portion of mortgage repayments, known as Support for Mortgage Interest (SMI). This takes the form of a Government loan which must be paid back with interest upon the sale or transfer of the property.

For more information, see the Government’s guidance on SMI.

If SMI is unavailable and negotiations with the mortgage lender fail to result in a mutually agreeable repayment plan, other options may need to be considered. These include:

• obtaining a new mortgage with a different lender

• selling the property - this may involve downsizing or moving to a more affordable area, or even renting

• voluntary repossession - moving out and handing the keys back to the mortgage lender should only be considered as a last resort. This is because it does not avoid repayments which fall due before the property is sold, makes it more difficult to obtain a mortgage in the future, and can potentially lead to being classed as 'intentionally homeless' (which makes it more difficult to find council accommodation)

• Scottish Government schemes - where a mortgagor is located in Scotland they may be eligible for the Scottish Government’s Mortgage to Rent or Mortgage to Shared Equity schemes, or a different mortgage rescue scheme operated by the local housing authority

England and Wales

Before taking repossession action, mortgage lenders must first consider requests to alter mortgage payments and respond to any offers of payment within 10 days, providing reasons for declining. They must also provide a reasonable amount of time for the mortgagor to consider any proposals they put forward. Lenders then need to give 15 days' written notice if they plan to take court action for repossession.

Once repossession action has started, the mortgagor has 14 days to return a defence form, setting out any arguments against repossession. The next step is the court hearing (which generally takes place in a judge's chambers), where a decision will be made on a type of repossession order - or to adjourn or set aside the case.

For more information, see the Government’s guidance on repossessions.

Scotland

Before taking any repossession action, the mortgage lenders must send a notice of sums in arrears to the mortgagor (this is to inform the mortgagor that they have fallen into arrears). This is known as a ‘default notice’ and requires the mortgagor to repay the arrears or make good the default (typically within 1 month). Mortgage lenders must also provide the mortgagor with a reasonable amount of time to consider any proposals they put forward.

If the arrears have not been repaid or no repayment arrangement has been agreed upon, the mortgage lender can then issue the mortgagor with a calling-up notice. A calling-up notice gives mortgagors 2 months to pay the arrears and mortgage/loan in full.

If the arrears are not repaid, and no alternative arrangements are made, the mortgage lender can apply to court. Before being taken to court, the mortgagor will receive an initial writ and a section 24 notice informing them of the repossession case at the Sheriff Court. 

Once repossession action has started, the mortgagor has 21 days to return a defence form, setting out any arguments against repossession. The next step is the court hearing, where a decision will be made on a type of repossession order - or to adjourn or set aside the case.

For more information, read the Scottish Government’s guidance on repossession.

Mortgagors who feel they have not been treated fairly by their mortgage lender in relation to arrears can complain to the Financial Ombudsman Service. The Financial Ombudsman helps consumers (ie private individuals) settle disputes they have with any financial service providers (eg mortgage providers). They may ask the lender to offer a new repayment plan or repayment holiday and can even tell a lender to refund a mortgagor if they consider charges applied to arrears to be unfair.

For more information, visit the Financial Ombudsman Service website.

Tenants (also known as ‘contract holders’ in Wales) will generally need to leave a property which is subject to a repossession order. However, they may be able to stay if:

• the mortgage lender agreed to the contract

• they were living in the property when their landlord was granted a mortgage (ie they were a ‘sitting tenant’)

• the mortgage lender has recognised their tenancy (eg by asking them for rent payments)

For more information on the rights of tenants facing eviction due to mortgage arrears, read the Citizen’s Advice guidance for England, Wales and Scotland.