Mortgage arrears and repossession
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 you take out a mortgage the mortgage lender will tell you how much you have to pay each month. If you fall behind on your repayments, you'll be in 'arrears' and your lender will contact you to discuss the situation.
Initially, your lender will simply ask you to clear the arrears. If you don't do this they will eventually take you to court and seek repossession of your house. If your property is repossessed it means it will belong to the bank and you'll be evicted.
Simon, aged 24, bought a one-bedroom flat in south London two years ago. His mortgage payments are nearly £900 a month but he ran into problems six months ago when he lost his banking job.
He says: "I didn't have any savings because I'd spent every spare penny buying the flat and doing it up. I told my mortgage lender when I lost my job and they switched my mortgage to interest-only, so my payments dropped to about £600. But I still had trouble paying that and fell into arrears. I was really worried when I was asked to call them straight away, as I thought they would repossess the flat."
How to get out of arrears
Banks only repossess homes as a last resort - they prefer to come to an arrangement with the borrower. If your financial difficulties are only short-term, you could ask the lender to reduce what you have to pay each month. This might involve switching to an interest-only mortgage, or extending the term of the mortgage.
Whatever you do, your mortgage lender will want you to pay off your arrears as soon as possible. You might be able to do this by discussing your financial situation with a debt advisor.
If your income doesn't stretch to making extra payments, there are several ways you might be able to increase it:
- Benefits and tax credits
- Claiming on a payment protection policy
- Getting a lodger
Talking to your lender
If you fall into arrears it's important you keep communicating with your lender. Work out how much you can afford to pay each month and make it an offer. A debt advisor can help you do this.
Whether or not the lender accepts your offer, keep making regular payments to the mortgage even if you can't afford much. If you don't, or don't pay enough, the lender may take you to court. They will write and tell you if they intend to do this.
If a court date is set, make sure you turn up and get expert advice. In some cases, the judge may allow you to stay in your property as long as you keep to an agreement to pay. The judge will take into account whether the mortgage lender followed the rules when they took you to court and whether you've continued to make payments on the mortgage.
Simon's mortgage lender asked him what he could afford, and agreed he could pay £200 a month until he got a new job.
He says: "I'm working again now and can afford my payments. However, I'm still about £1,200 in arrears. I'm paying a bit of this off each month. It's been really stressful."
What happens if your house is repossessed?
If you're unable to pay off your arrears, the court will probably give the lender permission to evict you from your home. You'll normally have 28 days to move out, after which bailiffs will visit and remove you and your stuff.
The lender will then sell the property. If they don't make enough from the sale to cover the money you owe on your mortgage, you will have to pay the difference, known as the 'shortfall'.
If your house gets repossessed you'll need to find somewhere else to live. It's unlikely you'll be allowed to take out another mortgage, so renting will be your best option. If you can't find somewhere to rent our section on homelessness can help you.
Other options
If you can't pay off your arrears you might want to sell the property yourself rather than have it repossessed, as you'll probably get a better price for it. If you sell your property you will need to use the money to pay off your mortgage.
'Mortgage rescue schemes' are run by private companies who buy the property from you and then rent it back to you. Although this might seem like the perfect solution, it rarely is because these firms are unlikely to give you a fair price for your property. Once you're a tenant in the property, you'll have few rights and might be evicted anyway.
With thanks to the Citizens' Advice Bureau for their help with this article.
Written by Emma Lunn
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