Negotiating with mortgage lenders

Borrowers facing a reduction in income due to workplace closures, self-isolation or sickness should check insurance policies, such as income protection and policies that come as part of a bank account or home insurance.

Government instructions to mortgage lenders to allow payment breaks ended on 31 July 2021.

Some borrowers had a break from making mortgage payments due to the effect of the Covid-19 pandemic on their finances. Borrowers can ask their lender for confirmation of how the unpaid payments are to be repaid.

Interest on unpaid amounts

Mortgage lenders are entitled to charge interest on unpaid instalments, even if a payment break was granted in line with FCA guidance. If the unpaid instalments are added to the mortgage balance, the borrower will pay more over the remaining term of the loan. This is because interest is calculated on the outstanding balance.

Advisers who are assisting a borrower with mortgage lender negotiations should gather information about the borrower's circumstances. The borrower might decide the mortgage is not affordable in the long term, and want to find out about their other housing options.

If they do want to stay in the home, the adviser will need to find out:

• the borrower's income, and if it will cover the mortgage payment

• how much the borrower can afford to pay towards any arrears

• whether the borrower is expecting a change in circumstances that will affect their finances

Find more information in the guide Are you worried about your mortgage?

The borrower should offer what they can reasonably afford. They should concentrate on controlling the arrears and ask for concessions that make the payments manageable. It is important to continue to make regular payments to demonstrate to the lender that the situation is under control. A lender is more likely to delay taking possession action if some payments are being made.

Financial statements

Payment proposals should be in writing and supported by a statement of income and expenditure, where possible. A debt adviser can help to prepare a financial statement in line with current good practice guidelines. A budget planner is available to download on the Money Helper website.

Timeline for repaying arrears

Most mortgage lenders will expect the arrears to be repaid before the mortgage term ends. If the lender does not agree to the borrower's proposal for repaying arrears, the borrower should get advice from a debt specialist.

The Pre-action Protocol for Possession Claims based on Mortgage Arrears sets out steps that the lender and borrower should take to avoid possession proceedings.

The lender is required to:

• discuss the reason the borrower is in arrears

• find out whether the situation is temporary or long term, and their financial circumstances

• consider reasonable requests to vary the regular date of payment or method of payment

• discuss proposals for repayments of the arrears

Non-compliance with the protocol can result in a possession case being adjourned, or an order that the mortgage lender needs to pay the costs of the case.

The FCA Mortgage Conduct of Business (MCOB) 13: Arrears and possessions states that a lender must make reasonable efforts to reach an agreement with the borrower as an alternative to taking possession proceedings.[1]

Lender's obligations

Each lender must have written policy and procedures for dealing with borrowers in mortgage arrears. The lender does not have to provide a copy to the borrower.[2]

The FCA rules say that lenders must consider whether it is appropriate to do one or more of the following for borrowers in arrears:[3]

• extend the term of the mortgage

• change the type of mortgage

• defer payment of interest due

• capitalise the arrears

• make use of any government forbearance schemes that it has signed up to

The lender must give the borrower adequate information to understand the implications of any proposed arrangement for paying off the arrears on the mortgage. For example, adding the arrears to the mortgage balance could increase the monthly payment and the total amount payable under the mortgage.

In one case, the High Court held that a lender's failure to comply with the FCA's regulations did not stop the mortgage lender from obtaining a possession order.[4] In practice, if rules have been breached, the borrower can ask for an adjournment to take the case to the Financial Ombudsman Service.[5]

The borrower should complain in writing to the lender if the lender does not follow the FCA rules. The lender must send its final response to the complaint within eight weeks.[6]

If the borrower is not satisfied with the response, or the lender fails to respond within eight weeks, the borrower can complain to the Financial Ombudsman Service.

See the FCA guide to complaints for more information. The FCA does not investigate individual complaints itself.