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Cutting the mortgage costs

This content applies to England & Wales

How borrowers might be able to reduce the cost of their mortgage.

When dealing with mortgage arrears cases, advisers should consider whether it is possible to reduce the cost of the mortgage and other associated costs. Most responsible lenders will allow borrowers more time to resolve difficulties if they know that the situation is no longer deteriorating.

Maintaining current payments

If possible, the borrower should pay the interest on the loan to avoid the total amount of debt increasing and to reduce the risk of repossession. The borrower might be able to reduce the arrears with a lump sum and/or regular payments. Advisers should find out if the borrower has any assets or income available for this purpose.

A lender may be willing to accept less than the full interest payments if the borrower is trying to sell the property. Even a nominal payment could be accepted for a short time if the property is being actively marketed.

In some cases, it might be better to maintain an endowment or life policy at the expense of interest payments, eg where payment difficulties are expected to be short term or where the borrower is suffering from a life-threatening illness.

Some endowment policies allow a break in payments as part of the agreement. Payments can be missed for a period of time (usually not more than 12 months) and the unpaid premiums then have to be repaid within a certain period of time. To find out whether this option is open to the borrower it will be necessary to check the policy and contact the insurance company.

Changing the method of repayment

The Financial Conduct Authority (FCA) Handbook Mortgage Conduct of Business (MCOB) 13: Arrears and possessions specifies that a lender must make ‘reasonable efforts’ to reach an agreement with a customer over the method of repaying any shortfall.[1]

A number of different options might be available to borrowers. Most involve reducing payments for a short or long period. It is important to remember that, whatever repayment arrangement is made, the total amount of the loan, interest and arrears will still have to be paid off by the end of the mortgage term.

The different options are listed below. Unless stated otherwise they apply to both capital repayment and endowment mortgages. (The section on buying a home explains the different types of mortgage available).

Capitalising the arrears

If payments are made to the lender's satisfaction for a certain period, the lender may agree to capitalise the arrears (also referred to as consolidating the arrears). This means that the arrears will be added to the mortgage and repaid over the remainder of the mortgage term. The lender may also agree to extend the term of the mortgage so that the monthly payments do not increase. Such agreement is likely to depend on the age and future prospects of the borrower. Lenders will not normally agree to capitalising the arrears if they are increasing.

Some mortgage agreements allow the lender to unilaterally restructure the mortgage. However, the discretion to capitalise the arrears unilaterally has to be exercised reasonably[2], for instance by attempting to secure the agreement of the borrower and carrying out an assessment of affordability first. Once arrears have been consolidated over the remaining of the mortgage term, the lender should not be able to seek an order for possession for the non-payment of those same arrears.[3]

Scheduled repayments

If the borrower anticipates an improvement in her/his circumstances in the near future, such as a substantial pay rise in six months' time, the lender may agree to a scheduled payment of arrears. This would mean that the borrower would initially pay a smaller amount towards the arrears, followed by increased payments later on.

Refinancing the loan

Some mortgages and loans have very high interest rates. Borrowers in this situation might want to consider refinancing their debt. One option is to take out a mortgage to pay off the expensive loan and reduce the borrower's monthly outgoings. Borrowers in this situation should get independent financial advice. There are a number of companies offering to 'consolidate' debts but borrowers should be wary of doing this if it does not actually reduce the amount of interest they are paying. Some companies charge borrowers a monthly fee for this service and this might not be appropriate for borrowers who are trying to reduce their outgoings. An alternative option would be for the borrower to consult a national organisation that offers free, independent advice, such as National Debtline or the Consumer Credit Counselling Service.

Extending the term of the mortgage

For a capital repayment mortgage, extending the repayment term could reduce payments. However, this course of action can substantially increase the total cost of the loan, in return for fairly small savings in the short term. Various tools are available on the internet to help calculate both the cost of monthly repayments as well as the total cost of the loan.

Temporarily paying only interest

For a capital repayment mortgage, the borrower could ask the lender to accept payments for interest only. This would lower the amount of outgoings for the borrower. However, it would also mean that the debt would take longer to clear. The amount of difference this will make to monthly payments will depend upon the length of time the mortgage has been running as the proportion of interest decreases further into the period of the loan.

Switching to a repayment mortgage

For an endowment mortgage, the borrower could convert to a capital repayment mortgage, which may be cheaper than an endowment mortgage. If the borrower is an Income Support/income-based Jobseeker's Allowance claimant, the change may mean a higher rate of benefit is paid. In most cases, the lender will make a charge for the conversion and this will need to be taken into account.

Cashing in or selling an endowment

If the borrower has an endowment mortgage, s/he may be able to cash in the endowment policy, or sell it for a cash value of more than the surrender value (if the policy has been held for a long time). However, clients should always seek independent financial advice if they are considering this option, as it is not always wise.

It might be a useful way of paying off arrears if an acceptable alternative can be found to cover the mortgage. If the endowment policy has been 'assigned' to the lender (this means the lender holds the policy and has first claim to any value when it is surrendered), it cannot be surrendered or cashed in without the lender's permission.

However, because the return on most endowment policies is linked to investment performance, many borrowers could find that their policies do not have a high enough cash value to make this a viable option. If the lender did not explain this when the endowment policy was sold, or if the borrower feels that the policy was mis-sold for other reasons, s/he should consider making a complaint.

Payment protection

A borrower may take out a form of insurance called payment protection. This is designed to meet all or part of the mortgage costs of a borrower who loses her/his job or becomes too ill to work.

However, in most cases, the borrower will need to have been unemployed or ill for a certain amount of time before any payments will be made. This type of insurance is also relatively expensive and may be difficult to claim if the borrower was unemployed, self-employed or working on temporary or fixed-term contracts when the policy was taken out.

Help with mortgage and housing costs

For information about help with housing costs for home-owners see Support for mortgage interest.

[1] FCA, MCOB 13.3.2A.

[2] Paragon Finance Ltd v Nash; Paragon Finance plc v Staunton [2001] EWCA Civ 1466; Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083; see also Bank of Scotland plc v Rea, McGeady, Laverty [2014] NIMaster 11.

[3] Bank of Scotland plc v Rea, McGeady, Laverty [2014] NIMaster 11 (Northern Ireland High Court decision but principle outlined should be applicable in England and Wales).

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