Alleviating Arrears Problems

Lenders have the following measures which they can use to help some borrowers in arrears difficulties:

Extend the Term of the Mortgage

(a) In the case of a repayment loan the term of the loan can be lengthened, although in most cases this does not make a significant difference to the monthly repayments.

Change the Type of Mortgage

(b) An investment backed mortgage may be changed to a repayment, or interest only, mortgage with a subsequent reduction in monthly outgoings. The borrower should also take appropriate professional advice.

Defer Payment

(c) Payment of part of the interest may be deferred for a period. This may be particularly appropriate where there is a temporary shortfall of income (for example, because of an industrial dispute or a temporary illness), or where there has been a rapid increase in interest rates. Lenders may in certain circumstances be willing to accept, for a reasonable period of time, the most the borrower could reasonably afford if this is in the best interests of both the lender and the borrower. However, this is not a solution where, because of a permanent reduction in income, a borrower is unable to afford anywhere near the full mortgage repayments and there is little prospect of an improvement in the situation in the foreseeable future.

Capitalise Interest

(d) Linked to (c) is the possibility of capitalising interest. This may be appropriate where arrears have built up but full monthly repayments can be resumed. The amount outstanding (capital sum and arrears of interest) may be rescheduled and repaid over the life of the loan. This might have an impact on the interest rate levied, whether a repayment vehicle will repay the loan in the case of an investment backed mortgage and eligibility for mortgage interest relief at source (MIRAS). Such an approach is unlikely to be adopted where the borrower has in the past failed to adhere to an alternative payment arrangement. When agreeing alternative repayment arrangements, lenders will carry out an appraisal of a borrower's ability to meet the repayments. In some cases, the arrangements might be made for a specific period of time, after which an assessment is made as to whether the circumstances have changed to the extent that the arrangement can be varied. In addition, lenders try to ensure that the borrower is aware of the availability of social security benefits which might apply such as income support to meet part of the mortgage interest repayments where a borrower is unemployed. Where the borrower has a multiple debt problem, the lender might suggest that the borrower contact a Citizens Advice Bureau or debt advice agency (press link on the left panel). At the borrower's request and with the borrower's consent, the lender will liaise wherever possible with a debt counselling organisation, for example, Citizens Advice Bureaus, money advice centres or the Consumer Credit Counselling Service (press link on the left panel).

In the vast majority of cases these approaches, together with the efforts of the borrower, are sufficient to prevent a minor arrears problem from becoming a major problem leading to possession. It is significant that while many people fall into arrears for a short time, a much smaller proportion have large arrears and a very small proportion result in possession. Where mortgage arrears have accrued on an account, lenders recognise the need for the account to be closely administered by staff with relevant expertise in dealing with borrowers experiencing repayment difficulties. Details of the mortgage account may be transferred to the lender's specialised mortgage arrears department, where the staff would liaise directly with the borrower. Alternatively, the account may be administered by the local branch, with overall monitoring by the lender's central arrears department. The borrower would be contacted to establish why the mortgage repayments were no longer being made, whether the borrower's circumstances had changed, for example, if the borrower was no longer employed, and if an alternative payment arrangement could be agreed. A record of the mortgage arrears may be held by a credit reference agency.

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