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Calculating arrears

This content applies to England & Wales

How mortgage arrears are calculated.

Most mortgages have a clause that states that if the borrower misses payments then the whole of the sum outstanding with accumulated interest will become due. Section 8 of the Administration of Justice Act 1973 allows the court to treat as due only those sums that would have been payable had there been no such clause. Therefore, there is no requirement to pay the whole sum back immediately.

Where the term has come to an end the whole sum outstanding is due. There is no longer a right to pay by instalments and the court must make an order that requires payment of the balance of the mortgage in a reasonable period.[1]

Due to the wording of section 8, it may be possible to argue that certain sums that are only payable if there is a breach of the terms of the mortgage should not be considered by the courts when deciding whether the arrears can be paid off within a reasonable period. Although sums such as insurance premiums, administration costs and interest on arrears can legitimately be added to a mortgage account, it could be argued that they should not be covered in a possession order but paid off separately, perhaps after the other arrears have been dealt with. This may be a deciding factor as to whether or not the borrower can afford to make an acceptable proposal to the court.

There is no case law confirming whether this is the correct approach. However, in one case, it was found that section 8 did not prevent the lender from claiming a higher rate of interest after a default where the mortgage was a deferred rate mortgage and there was a clause in the agreement allowing this.[2] The 'unfair relationships provisions' in the Consumer Credit Act 1974 are not available for regulated mortgage contracts[3] unless the agreement was Consumer Credit Act regulated at the point it was executed.[4]

[1] LBI HF v Stanford [2015] EWHC 3131 (Ch).

[2] CIBC Mortgages v Farmer 7 July 1992, CA (unreported).

[3] art. 60C(2) Financial Services and Markets Act (Regulated Activities) Order 2001 SI 2001/544.

[4] art. 29(12) Mortgage Credit Directive Order 2015 SI 2015/910.

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