More than three-quarters of a million people may be in line for some good news from their mortgage lender. These borrowers may have been forced to pay higher mortgage charges or extra fees because they were in arrears; however, the Financial Conduct Authority (FCA) says that lenders should not have added this amount to the mortgage.
How did we get here?
What seems to have happened is that people who were in arrears with their mortgage payments had the arrears added to their mortgages. The effect of this is that the arrears can take longer to pay off and, of course, the monthly mortgage payments increase to reflect the amount that has been added to the loan.
At first glance this may seem to be a good arrangement, with the borrowers having the amount of their arrears added to their mortgage and paid off in the long term; however, at the same time as doing this, companies appear to have continued to go after the customers to get them to pay off the arrears at once.
Forcing borrowers towards payday lenders
Adding the arrears to the mortgage debt is known as ‘automatic capitalisation’ and there are two reasons that this practice has come under criticism. Firstly, it is not transparent to the borrower, who may not realise what has happened; secondly, it can be disadvantageous to mortgage holders because the increased amount of the mortgage may drive someone who is already teetering on the edge financially into the arms of payday lenders to meet the monthly costs.
This is the point at which many borrowers would be well advised to ask themselves “Is an IVA for me?” and consider taking out an individual voluntary arrangement (IVA) to manage their debt situation.
The FCA has now said that lenders must take account of the borrowers’ individual circumstances before they consider adding the arrears to the mortgage repayments; in addition, they must obtain the customers’ agreement. It has told lenders to identify the borrowers who have been negatively affected by these practices and is now consulting on fresh guidelines concerning how borrowers with mortgage payment arrears should be treated.
Your lender will contact you directly if you are affected; meanwhile, if your debts are substantial, you may want to seriously consider a debt arrangement.