Reducing arrears

A borrower may find ways of reducing the arrears by making either one substantial lump-sum payment or a series of regular payments in addition to the normal mortgage payments (for example, over 12 to 24 months).

In some instances, borrowers have endowment policies not linked to the mortgage and may be able to get a good price for assigning them (commonly known as 'selling' them) to a broker. The policy continues to run and the purchaser pays the premiums until maturity of the policy. Generally, in the early years of a policy, assignment will result in a higher payment than cashing-in. Cashing in endowments early is not usually a good idea as the borrower will lose a substantial amount of the potential value of the policy.

It is important not to encourage borrowers to take out an extra loan to repay mortgage arrears. Many such refinancing or re-mortgaging deals are very expensive in terms of a high interest rate, fixed indefinitely, and with penalties for early redemption (for example, three months' additional interest).

The technical term for this is 'capitalising the arrears'. Lenders may consider this if the arrears are in respect of the initial (first) mortgage and there is substantial equity value in the house.

Many lenders will require firm evidence of the borrower's good intentions and her/his future ability to maintain monthly payments before agreeing to this, for example receiving regular payments at an agreed rate for several months and/or being provided with proof of the start date of a new job.

The effect of capitalisation is that the arrears will be added to the original capital of the mortgage loan, and repaid over the remainder of the mortgage term. Lenders may agree to extend the term of the mortgage in order that the borrower is not required to pay increased monthly payments over the period of the loan.