Mortgage arrears
What to do if you’re behind on your mortgage payments
As a homeowner, your house is supported not only by its physical structure but also by your capacity to meet mortgage payments. If you miss these payments, you enter into arrears, which could jeopardize your home through a process known as repossession. This guide outlines the critical actions you should take if you find yourself in arrears.
Not yet in arrears but worried about it?
This guide is aimed at homeowners who are already in mortgage arrears. If you’re not, but are struggling with your repayments – or are worried you might soon be – there’s new help available.
What does being in ‘mortgage arrears’ mean?
Missing a mortgage payment can lead to what’s known as ‘mortgage arrears’—a situation where overdue payments accumulate.
While the term ‘arrears’ might sound daunting and something you’d prefer to avoid, it’s crucial to address it rather than ignore it. The issue won’t resolve itself on its own.
Being in mortgage arrears can have severe consequences, such as damaging your credit report, which may hinder your future borrowing capacity. In the worst-case scenario, ongoing arrears could even lead to losing your home through repossession (which we discuss further below).
With mortgage interest rates higher than in recent years and the ongoing cost-of-living crisis, more people are at risk of falling into mortgage arrears. UK Finance reports that by the end of 2023, nearly 95,000 homeowners were in arrears.
If you’re not currently in arrears but are having difficulty making payments or are worried you might face this issue, check out our Struggling to Pay guide.
For those who are already dealing with mortgage arrears, this guide provides step-by-step assistance. Keep reading for detailed help…
Step 1: Contact your lender now
Failing to make a mortgage payment without informing your lender can lead to arrears and set the process of repossession in motion.
If you’ve missed one or more payments and haven’t yet reached out to your lender—especially if there’s a chance you might miss another—it’s crucial to contact them as soon as possible.
Additionally, any overdue mortgage payments that aren’t addressed with your lender can severely affect your credit report. Late payments, missed payments, and defaults can remain on your credit file for up to six years, potentially impacting your ability to secure future loans.
Ask your lender what support it offers
The kind of assistance a lender can provide when you’re facing financial difficulties usually varies based on your specific situation and your repayment capacity (you may need to supply a detailed account of your income and expenses to determine this).
Consequently, lenders often describe the aid they provide to homeowners in distress as ‘customized support.’ This support might encompass:
- Reducing your repayments. Here your payments will be reduced from their normal monthly amount for a limited period of time.
- Taking a break from repayments. Here your payments will reduce to zero for a limited time.
- Switching temporarily to an interest-only mortgage. In this scenario, you’re not repaying the principal of the loan, only the interest that’s building up. This can significantly lower your monthly payments, with the extent of the reduction varying based on your stage in the mortgage term. During the initial years, the effect may be minimal, but as you approach the end of the term, the impact becomes much more pronounced.
- Extending the term of your mortgage. Extending the loan term—from 25 years to 30 years, for instance—allows you to distribute the debt over a more extended period, thereby decreasing the monthly repayment amount.
Although these alternatives might provide immediate relief, it’s important to remember that they will eventually increase the overall cost of your mortgage. Therefore, once it’s feasible and suitable, aim to return to your regular mortgage payment amounts.
Will accepting mortgage support impact my credit file?
If you’re having difficulty with your mortgage, it’s important to know that contacting your lender to talk about your situation won’t affect your credit report. Don’t hesitate to reach out for help.
However, if you end up agreeing to a mortgage support arrangement with your lender, this is when your credit report might be impacted. Essentially, other lenders may be able to see that you have entered into a payment plan for your mortgage.
Your mortgage lender should clarify how any form of mortgage assistance they provide will appear on your credit report. Generally, this will lead to:
- An ‘arrangement’ marker being added to your credit file. This note will probably be recorded when you opt for a temporary support arrangement, such as a brief interest-only period or a reduction/holiday in payments. This indicator will be visible to other lenders, but it will be erased once the arrangement concludes. However, lenders will still have access to historical records of such arrangements, though the impact of this information will lessen over time.
- Arrears appearing on your credit file. In scenarios where you opt for a temporary interest-only arrangement or a reduction in payments/holiday—essentially whenever you’re not fulfilling the full, agreed-upon monthly repayments—outstanding arrears will persist until they’re fully repaid. However, your lender may offer to incorporate these arrears into your mortgage balance through a process called ‘capitalisation.’
Even after you’ve settled any overdue payments, records of missed, late, or partial payments can remain on your credit file for up to six years. Nonetheless, their impact tends to diminish over time, as lenders generally focus more on your recent credit behavior.
It’s challenging to determine precisely how a mortgage arrangement or arrears might influence your future borrowing potential. Much depends on your overall credit history (refer to our top tips on Improving Your Credit Score) and the specific lender you approach for credit.
However, it’s advisable to address arrears through an arrangement with your lender. This agreement provides clarity to other lenders about your situation, rather than leaving them uncertain about the reasons behind the arrears.
Step 2: Claim on any insurance
If you hold any type of mortgage insurance, including Mortgage Payment Protection Insurance (MPPI) or coverage for accidents, sickness, and unemployment, it’s time to initiate a claim. (If you don’t have insurance, proceed to step 3.)
Contact your insurance provider as soon as possible. If you’re unable to make mortgage payments due to unemployment, you will probably need to demonstrate that you’re actively seeking new employment. If the issue is health-related, you’ll need to provide a doctor’s certification.
The amount you receive from MPPI was established when you initially purchased the policy, so refer to your documents if you’re uncertain. Generally, MPPI policies cover your mortgage payments for a period of one to two years.
Be aware that it might take several weeks before the insurance benefits begin.
What type of insurance do you have?
Here’s a quick refresher on the various types of insurance policies you might have, in case you need a reminder of what coverage you’ve secured:
- Mortgage payment protection insurance (MPPI). This insurance is intended to provide temporary coverage for your mortgage payments if you are unable to work due to an accident, illness, or, in certain cases, unemployment resulting from redundancy. However, it does not apply if you voluntarily leave your job without securing another one. Additionally, if you are currently employed but facing financial difficulties, this insurance will not offer assistance.
- Accident, sickness and unemployment policies. These pay out a pre-agreed amount based on your earnings, not your mortgage, for up to two years.
- Income protection insurance (IP). This pays out a pre-agreed amount based on your income in the event of accident or sickness, until you either return to work or reach retirement.
Keep in mind that there is no legal obligation to insure your mortgage payments, so it’s possible that you might not have any insurance in place to cover them.
Step 3: Reassess your finances
If the assistance provided by your lender is insufficient to help you manage your monthly mortgage payments, it’s important to look into alternative methods to alleviate the financial strain.
Even if the current support from your lender has addressed your immediate repayment issues, it’s prudent to consider additional options to minimize the risk of future arrears.
Do a budget NOW
A budget isn’t solely for those who are having financial difficulties – it’s an essential tool for anyone looking to manage their finances effectively. Creating a budget allows you to identify any extra funds you might have and, if feasible, set them aside as a safety net for tougher times. You can use our complimentary Budget Planner to assist you in this process.
If you’re currently behind on your mortgage payments, you may have previously attempted to create a budget. However, it’s beneficial to revisit and update it, as your financial situation might have evolved since your last assessment of your income and expenses.
Check your benefits entitlement
Losing your job is a common reason for falling into mortgage arrears. If you’re in this position, soften the blow by signing on straightaway at your local Jobcentre while you look for work.
Even if your job situation remains the same, it’s important to ensure you’re not overlooking essential benefits—many individuals in the UK are not accessing the vital assistance they’re entitled to.
Don’t assume you won’t qualify. For instance, individuals with a household income up to £50,000 might still be eligible for Universal Credit (though we’re not suggesting it’s guaranteed at that income level, it’s still worth exploring, particularly if you have children or face high rent costs).
Check out our quick 10-minute Benefits Checker guide to see if you qualify for any support.
Government mortgage support is available for some
Certain individuals receiving benefits may qualify for government assistance with their mortgage payments, known as Support for Mortgage Interest (SMI). This program helps by covering a portion of your mortgage interest payments. The payment is made directly to your lender in the form of a loan, which you’ll eventually need to repay.
Here’s a summary of how SMI operates:
- The Government will cover part of your mortgage interest if you’re unable to pay. SMI applies to the interest on the first £200,000 of your mortgage balance (£100,000 if you’re receiving pension credit).
- The interest rate for SMI is determined by the Government. It is currently set at 3.16%, but it may adjust if the Bank of England’s average mortgage rate changes by 0.5% or more from the SMI rate. This means that as mortgage rates increase, the SMI rate will also rise, helping to cover the additional cost. Conversely, if mortgage rates decrease, the SMI rate will follow suit, though there may be a delay in these adjustments.
Who’s eligible for SMI?
To get SMI, you need to be receiving Income Support, income-based Jobseeker’s Allowance (JSA), income-based Employment and Support Allowance (ESA), Universal Credit or Pension Credit. Full details are on the Gov.uk website, but in brief:
– Income support, JSA or ESA. You’ll need to have been receiving one of these for at least 39 weeks in a row before you can claim SMI.
– Universal Credit. Under the current rules, you’ll need to have received Universal Credit for three months before claiming SMI. You can make a claim even if you get income from a job (in other words, if you’re receiving Universal Credit you don’t have to be out of work to be eligible for SMI).
– Pension Credit. You can claim SMI from the date you start getting Pension Credit.
So, if you’ve recently lost your job or had an income cut, it’s important you sign on at your local Jobcentre to get benefits, or the Pensions Office to get Pension Credit, as soon as possible, otherwise you won’t be eligible for SMI.
Your eligibility will automatically be assessed when you apply for one of these income-related benefits. If you already get one of these benefits and you’re living in England, Scotland or Wales, you can find further details about applying for SMI on the Gov.uk website, while the application process is slightly different in Northern Ireland.
SMI is provided like a loan
SMI was once provided as a benefit, but now it is offered as a loan. This change implies that you must repay the sum the state contributed to your mortgage when you either sell the property or transfer ownership. Additionally, these loans accrue interest, which is currently set at 4.5%, and the interest will compound since repayment is deferred.
What happens when I start work again?
SMI payments cease when your benefits end, which typically happens when you either go back to work or increase your working hours to earn additional income. Nevertheless, you might qualify for Mortgage Interest Run On (MIRO) to assist with your transition.
MIRO is available for a duration of four weeks and is provided at the same rate as your previous SMI payments. The key distinction is that MIRO is paid directly to you rather than to your lender. Check if you’re eligible at Gov.uk.
Live in Scotland? The Home Owners’ Support Fund can provide extra help
The Scottish Government provides extra to help struggling homeowners keep their homes. If you’re at risk of having your home repossessed, the Home Owners’ Support Fund may be able to help you. It’s made up of two schemes:
- Mortgage to Shared Equity. The Scottish Government buys a stake in your property so you can reduce your secured loan(s).
- Mortgage to Rent. This allows a social landlord to buy your home, and you’ll continue to live there as a tenant.
Find out more about the Home Owners’ Support Fund.
Live in Wales? The Help to Stay scheme can provide extra help
The Help to Stay program provides additional assistance to homeowners in Wales who face the risk of losing their homes and have exhausted all other support options. To qualify, your home must have a value of £300,000 or less, and your household income should not exceed £67,000.
The program involves securing an equity loan against your property. Essentially, the Welsh Government will lend you up to 49% of your home’s value and pay this amount directly to your lender, which will lower your monthly mortgage payments.
This equity loan, which is a secondary charge on your property, must be repaid within 15 years. For the initial five years, there is no interest on the loan. However, after this period, interest will be charged at a rate 2% above the Bank of England base rate until the loan is fully repaid.
As a result, the total amount you repay could exceed the original loan amount.
For more information, see the Gov.wales website.
Step 4: Seek free debt help
If you’re facing mortgage arrears, it’s possible that you’re also dealing with other debts and financial obligations. In such situations, it’s important to review all your debts collectively and work on managing and prioritizing them effectively. For a comprehensive guide on how to approach this, refer to our Debt Help Guide.
Should you encounter difficulties with your mortgage lender due to arrears, enlisting the support of a non-profit debt counseling agency can be highly beneficial. Additionally, if your lender decides to take legal action to repossess your property, demonstrating that you’ve been actively working to resolve the issue can be crucial. This evidence may influence the court’s decision and potentially prevent a repossession order from being issued.
The main debt help agencies are…
Full debt and consumer advice service. Many bureaux have specialist caseworkers to deal with any type of debt, including repossessions and negotiation with creditors. Find your nearest Citizens Advice centre or chat online with an adviser.
- Tel: 03444 111 444 (option 3)
- Opening times: Different for each bureau, so check your local branch for its hours, though they’re all closed on bank holidays.
- Web chat: Monday to Friday, 8am and 7pm (except bank holidays)
Advice NI offers a similar service for those in Northern Ireland.
A full debt help service is available across the UK. Online support is also available via its debt advice tool where you can create a budget and get a personal action plan with practical next steps.
- Tel: 0800 138 1111
- Opening times: Monday to Friday, 8am to 8pm, Saturday, 8am to 4pm (closed on Sundays and bank holidays)
National Debtline provides free advice and resources to help people deal with their debts. Advice is available over the phone, online and via webchat.
- Tel: 0808 808 4000
- Opening times: Monday to Friday, 9am to 8pm, Saturday, 9.30am to 1pm
When dealing with mental health challenges, specific approaches are necessary for issues related to repossessions. Our complimentary booklet, Mental Health & Debt Help, offers guidance on managing debts during stressful times, collaborating with financial institutions, and accessing free personalized debt counseling. Additionally, it provides tailored advice for individuals facing various mental health conditions, including bipolar disorder and depression.
Step 5: Your repossession rights
If you find yourself consistently unable to keep up with your mortgage payments, lack mortgage insurance or savings, and don’t qualify for any government assistance, it’s crucial to understand your rights regarding repossession.
What repossession means
A mortgage is essentially a loan backed by your property. This means that if you’re unable to repay the loan, the lender has the legal right to take possession of your home. Repossession occurs when the lender enforces this right by going to court and taking ownership of the property.
That said, lenders aren’t eager to repossess your home at the drop of a hat. In fact, repossession is generally considered a last resort for them. They typically do not want to repossess your property and are more inclined to work with you to find a solution. Therefore, maintaining communication with your lender is crucial and shouldn’t be avoided out of fear.
Major lenders have an agreement not to proceed with repossession until at least 12 months have passed since the first missed payment. Most lenders prefer to have you continue repaying rather than taking drastic actions, and regulators expect them to collaborate with you to make that happen.
However, if you continue to fall behind on payments and don’t attempt to address the situation, the lender may eventually take steps to repossess your home. Typically, they will put the property up for auction to secure a quick sale, which might not always fetch the highest price. Even after the sale, if the proceeds don’t cover the full amount owed, you could still be liable for the remaining balance. Therefore, if repossession seems unavoidable in the long run…
Consider selling the home yourself – you’ll probably get a higher price
In this approach, if you’re at risk of losing your home, you’ll have the advantage of managing the situation yourself. This might allow you to delay the process for a more favorable resolution and potentially walk away with some cash. Additionally, this strategy prevents a repossession from being recorded against you, which could significantly impact your ability to secure a mortgage in the future.
For more detailed guidance, check out our comprehensive guide on selling your property.
Final options to prevent repossession
Here are some final action points that you should try before getting to the point of repossession:
Ask your lender to amend your payment plan
It’s essential that banks refrain from initiating repossession actions while negotiations for a settlement are ongoing. The term to focus on is ‘ongoing’. Engage with your lender to explore alternative solutions that could reduce your monthly payments.
If you’re receiving correspondence from your lender and are choosing not to open the letters, they might claim that negotiations aren’t happening, which could lead them to commence repossession procedures.
Try to pay something
When negotiating with your lender, you might consider requesting a change in your payment due date or proposing a reduced monthly payment for a set duration. The lender should be open to these proposals and may also offer their own recommendations.
However, it’s crucial to first consult with a debt counselor to determine the most effective requests to make to your lender. This way, you’ll be well-informed about the best approach to take.
If repossession’s already happening
This is indeed the most challenging situation possible, but it’s crucial to understand the consequences if repossession occurs. Should your home be repossessed, the lender will proceed to sell it to recover the outstanding debt.
In cases where repossession is actively occurring…
- Don’t try to fight repossession on your own – free legal help is available. Repossession is a legal matter, so it’s crucial to seek legal advice promptly. However, you don’t have to incur any costs for this assistance. The Housing Loss Prevention Advice Service provides government-funded legal guidance and representation as soon as you get formal notice that repossession proceedings have begun. To find your nearest provider, enter your postcode and tick the box for Housing Loss Prevent Advice Service here.
- Always go to court hearings. A judge is much more likely to rule in your favour and give you longer to sort the problems out if you show you’re serious and turn up.
If you’re seeking guidance on court or legal matters, a debt assistance organization can offer valuable information.
In cases where your home is sold for an amount lower than your outstanding mortgage balance, you may be responsible for the remaining debt, referred to as the mortgage shortfall. Although this shortfall is no longer classified as a ‘priority debt’ and therefore your belongings cannot be seized to settle it, the lender still has the right to seek repayment. They can pursue this debt for up to 12 years, and any accrued interest can be pursued for up to six years. There’s a helpful factsheet on the National Debtline website with more information.