Mortgage arrears are often part of a bigger debt picture that could involve credit card bills, car finance and credit union loans. The question is often which do you pay first? A lot of people think that it is perhaps okay not to pay their mortgage because they think the bank themselves are offering grace because of the exceptional economic circumstances. Often, people pay their credit card bills before they pay their mortgage because credit cards can be seen as a form of income.
Banks will get back to regular business once the Nama process is over and when that happens you’ve got to make sure that you’ve paid your secured debts before you pay your secondary debts.
The most important thing for people for people who find themselves facing arrears is to open a line of communication with their lender, either directly or through a financial advisor. Keeping your head in the sand and hoping it will go away just does not work. From the banks’ perspective, they don’t know what is happening, and they may pursue a particular course of action.
While lenders would obviously prefer that people continue to pay their mortgage as arranged, they realise that some will face difficulties and they will try to reach an accommodation that is acceptable to both parties.
This can involve shifting the mortgage to interest only repayments, extending the period of the loan and thereby reducing repayments, or providing a short moratorium on repayments in the event of unemployment to allow borrowers time to get back on their feet.
The difficulty for the bank is that once a person is in arrears, no other bank will take them on. Banks have to have accurate reporting, because of their relationship with investors, and this includes reporting arrears.
If you are in arrears, draw up a detailed income and expenditure budget and present it to your bank to argue your case, or get a financial advisor to do this on your behalf. Mortgage lenders are legally bound by a code of conduct drawn up by the Financial Regulator. Lenders are obliged to communicate promptly with the borrower as soon as an arrears situation as developed, to establish why a repayment has not been made and how the situation can be rectified. If lenders fail to resolve the situation from the initial contact, they are obliged to continue to make efforts to contact the borrower.
Once contact has been made, they should advise the home-owner of all viable options available. Consideration must be given to their repayment capacity, previous repayment history and equity remaining in the property. Only after a third repayment has been missed can the lender issue a formal demand for payment. Any formal demand must include a number of details, including the total amount of arrears, any excess interest that may continue to be charged and the basis on which it will be calculated, as well as advice on the consequences and costs of the failure to respond to such a demand, such as legal proceedings. Furthermore, lenders must notify borrowers of their intention to commence legal proceedings before they do so.
Under the terms of the code of conduct, lenders are allowed to differentiate between customers who are in genuine financial difficulties and those who have the ability to pay but won’t. In making this assessment they are instructed to treat every case individually and consider borrowers overall level of indebtedness in conjunction with their income and expenditure.
In trying to reach any accommodation, the lender is obliged to explore several alternative repayment options. These include an arrangement whereby the amount of monthly repayment is changed; deferring payment of all or part of the instalment for a period; extending the term of the mortgage; changing the type of the mortgage, if it results in a reduction in monthly repayments; or transferring the arrears and interest due into the capital amount of the mortgage if there is sufficient equity in the property.
Regardless of which arrangement is agreed with the borrower, lenders have to provide a written explanation of the new terms agreed, together with figures on any additional interest or fees that may apply. They are also obliged to instruct the borrower of any other options available, such as selling the property, trading down or seeking alternative finance from another lender.
Find out More about Mortgage Arrears – Sunday Business Post Article “Ins and Outs of Arrears”.