Handling Mortgage Arrears – Terminology

Moratorium:
The lender agrees to freeze the repayments on the mortgage account for a specified period, normally 3-6 months. The borrower, with the consent of the Lender, makes no mortgage repayments during this period. This is most suited to a borrower who believes that their current financial issues are short term and their situation will improve in the coming months. What happens is that the borrower makes no payments to the lender on their loan however the interest that falls due is capitalised added to the loan, so the overall debt increases.

Extension of Term:
The lender agrees to increase the term from 20 years to 30 years, this reduction in the monthly capital portion of the mortgage means the borrower will pay a reduced monthly premium. however the loan will take longer to repay, resulting in a massive increase in the total cost of credit.

Interest only Facility:
The lender agrees to accept interest only payments for a limited period of time. This suits a borrower who is struggling to meet their current monthly repayments but are able to pay the reduced monthly repayments. The lender will normally agree to this arrangement if the borrowers situation might improve in the short term sometimes they are swayed if there is adequate equity in the property. During this period the borrow pays a reduced monthly repayment however no payment is made off the capital. When normal repayments start the monthly repayments will increase to allow the loan to be repaid within the term of the loan.

Payment Agreement:
The lender agree to a reduced monthly repayment in line with the borrowers income, this is reviewed regularly. This method suits borrowers who can not meet the full monthly interest repayments but can meet a reduced payment, they must also have the prospect of increased repayments capacity in the medium term. What happens is that any unpaid interest in capitalised and there will no repayments off the capital, this means that there will be interest on top of accrued interest, hence the capital owing will increase.

Debt Consolidation:
The lender will look at consolidating all the borrowers debts, mortgage, car, personal loans, etc, with the intent of reducing the borrowers overall monthly outgoings. There must be sufficient equity in the property. This will only be consider by the lender on a “case by case” basis, the borrower must show discipline with their financial affairs and that there is a genuine reason for the situation they are in. The borrowers overall monthly repayments are reduced as they are only making one monthly repayment, however they now have previously short term loans secured on their home, the overall loan on their home increases.

Capitalising Arrears:
The lender agrees to add arrears to the capital outstanding, this might be considered when a borrower demonstrates that they have returned to a repayment pattern in line with the original mortgage repayments and there is sufficient equity in the property. This means that the capital outstanding increases and the borrower will be paying interest on previously accrued interest.

Sale of Property :
This is when the borrower voluntarily sells the property and uses the proceeds to pay off the mortgage. This would suit a borrower who realises that the debt is unsustainable and would prefer to clear the debt. The risk here is that the sale of the property does not clear mortgage debt, plus any associated costs with the sale.

Voluntary Agreement:
This is when the borrower surrenders ownership of the property to the lender, who can then use their “power of sale” to sell the property and avoid legal expenses relating to repossession of the property. This action would suit a borrower who realises that their situation is unsustainable and who want to avoid further expense. The lender has the responsibility for any costs associated with the sales of the property.

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