Mortgage arrears are amongst the hardest debts to deal with. Mortgages by their very definition are loans that are secured on the value of your property. If you fail to make the necessary payments, then the lender is entitled to take the property and sell it in order to settle the debt.

This will result in alternative accommodation having to be found and worse still, the sale of the property may not even cover the debt, leaving you with a shortfall.

When are Mortgage Payments in Arrears

Every mortgage provider has its own definition and requirements for mortgage arrears. It is also worth bearing in mind that it does not have to be a mortgage debt that puts a property at risk. Any loan that is secured on a property could result in repossession. For example, a debt consolidation loan that is secured on a property offers a better interest rate, but the danger still exists that the property will be taken if the debt cannot be met.

Be clear about the terms and conditions attached to your loan or mortgage. Some T & Cs, for instance, will allow the lender to repossess the property after only three consecutive months' payments have been missed; others will state that you cannot be late on more than six payments in a year, before you are considered in arrears.

Other Issues with Mortgage Arrears

Further issues that may arise from mortgage payments in arrears include not only repossession but also the ongoing implications for your credit rating. Having a mortgage default on your record can seriously damage your credit rating and you may be unable to find a suitable mortgage, in the future. If you are facing the possibility of repossession you can speak to specialist mortgage brokers who may be able to assist with a ‘repossession remortgage’.

Once debtors are in the situation whereby they have extensive arrears, it can prove very difficult to regain ground, as additional payments will have to be made to cover the previous missed payments. For this reason, it is always better to deal with financial difficulty BEFORE an arrears situation actually occurs.

Many mortgage companies offer payment breaks or reductions in payments for a period of time to assist with unforeseen situations. By making this sort of arrangement, your credit rating will not be affected and you will not be at immediate risk of repossession.

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What To Do

If you suspect that you are about to fall into arrears with your mortgage, act fast and plan ahead. Speed really is of the essence. Refusing to admit that the situation exists or hoping that it will go away will do little to assist matters and it is absolutely vital that you get to grips with your situation.

Timing is Key

Most individuals will be more than aware that they are financially struggling, long before they find themselves defaulting on their mortgage. As soon as you become aware that you are unable to meet your monthly bills, contact your lender to arrange a meeting to discuss the situation. Whilst this is not a pleasurable experience, it will assist in the long run and will certainly add to your future credibility.

If you can come to some arrangement with your mortgage lender, this will not impact negatively on your credit rating and you will still be able to receive favourable mortgage rates, in the future.

Prioritise

Almost every debt publication that you read states that you should pay debts with the highest interest rate, first. This is only true if you are meeting your minimum payments on every debt, on a monthly basis. When you find yourself in the difficult position of being unable to meet monthly payments, the process of prioritising must be treated slightly differently.

Debts fall into two main categories, secured and unsecured. Unsecured debts tend to be those with a higher interest rate but are not actually secured on your property. Therefore, if you default, the lender cannot take your home or any other asset that you may have used as security. Conversely, a secured loan tends to be at a lower interest rate, but if you fail to make the payments then the asset that you offered as security can be taken by the lender. A mortgage is a secured loan, with your home as security. So, if you fail to make the minimum payment, you may find that the lender begins proceedings to repossess your house.

For this reason, it is absolutely vital that you make paying your mortgage your top priority, above and beyond other debts, every month.

Pay as Much as Possible

Even if you cannot make the entire payment, pay as much as you can while you try in the meantime to arrange an appointment with the lender to discuss the situation. Arrears will simply build up; if you miss a payment, it will remain due and will not be forgotten about or added to the end of your term. Consequently, you will have to make up any mortgage shortfall during the remaining period of your mortgage. The less you owe, the easier this will be to achieve.

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Rescue Scheme

A mortgage rescue scheme could offer an immediate solution for someone in financial difficulties, as well as providing a viable way of remaining in your home, long-term. If the financial predicament is merely temporary, it may be possible to negotiate reduced payments with lenders for a few months; however, for those with longer term difficulties a more radical approach may be necessary.

Mortgage rescue schemes are run and managed mainly by local councils and housing associations, although some private lenders also offer a scheme, in certain circumstances. Simply put, a mortgage rescue scheme involves the council, association or lender purchasing your property from you and then allowing you to live in the property in exchange for rent.

Whilst this, of course, means that you are no longer the house owner, it does mean that you are able to pay reduced monthly amounts without having to move home. If the market value of the property is higher than the value of your mortgage, you might even find that you are left with a chunk of equity which can assist to clear other debts you may have.

As well as an outright purchase, many housing associations and councils also offer a shared or part ownership option whereby they purchase a proportion of your property. You then pay a smaller mortgage and a smaller rent amount which, in total, should be less than your current mortgage.

In most schemes, it is possible for the individual to repurchase their property at a later date if their situation improves. Bear in mind, however, that any gain in the value of the property will have to be taken into account.

Eligibility for a Mortgage Rescue Scheme

Typically, the type of people who may be eligible for this scheme include those who have had a large reduction in income (but are, nevertheless, still able to make small monthly payments), those who have minimal mortgage arrears, who need to stay in their current area due to commitments such as school / work, or when the property is in an area where there is a shortage of council accommodation.

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What is a Mortgage Shortfall

A mortgage shortfall occurs when a property is repossessed by a lender following significant arrears and is then sold on at a value which is less than the outstanding mortgage. This can happen because the value of the property has decreased, over the years, or because the lender accepts a lower offer in order to sell quickly.

When the lender is faced with a mortgage shortfall situation, they will then pursue the previous owner or owners for the remaining balance.

Dealing with a Claim for Shortfall

All building societies have a duty to get the best price which can be reasonably obtained; correspondingly, banks have a duty of care to the borrower. Since the end of October 2004 the Financial Services Authority mortgage rules state that all lenders must now obtain the best price that might reasonably be paid. This offers an avenue for an individual to dispute a claim for a shortfall.

If you find yourself in a shortfall situation, consider the following arguments:

Useful Resources

Debt Advice

Step Change National Debt Line

Legal Advice

Citizens Advice Bureau CLS Direct Free Legal Advice

Regulatory Bodies

Financial Ombudsman Service Financial Services Authority Council of Mortgage Lenders

Your home may be repossessed if you do not keep up repayments on your mortgage

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