How To Stop Falling Into Arrears

Follow these steps to avoid falling behind with your mortgage.

If you are having problems paying your mortgage you are probably feeling pretty stressed. What you don't need is your mortgage lender turning the screws on you to pay up, or charging you extra for missed payments. It only makes a bad situation worse, and can cost you a lot of money.

So, following the credit crunch, how are lenders currently reacting in this situation? Will they deliberately make a bad situation worse for borrowers?

Not good enough?

This week the Financial Service Authority (FSA) published a review pointing to weaknesses in the way some lenders are handling arrears and repossessions, particularly for consumers with impaired credit histories.

It said that while mainstream lenders are largely complying with requirements, there are particular concerns with specialist lenders. It accused them of:

- Operating a `one size fits all' approach

- Focusing too strongly on recovering arrears according to a strict mandate, without reference to the borrower's circumstances

- Being too ready to take court action

There were also concerns that lenders in general:

- Could do more to consider individual circumstances and offer more options to resolve the arrears position

- Impose charges that could result in the unfair treatment of customers

- Do not exercise sufficient oversight of third parties contracted to carry out mortgage arrears handling

This is serious stuff, particularly in the current environment where the number of borrowers facing arrears is increasing. 

Not surprisingly, lender associations have hit back at the review. The Intermediary Mortgage Lenders Association (which counts a high proportion of specialist lenders as members) said all its members work hard to reach a reasonable agreement with the customer in difficulty, and treat borrowers as sympathetically as possible. 

It's all very well for the FSA to say it has found poor practice and for lenders to say they treat customers fairly, but it is you who really knows. If you have had experience arrears handling -- good or bad -- please share it with us.

What can you do?

If you feel your lender is treating you unfairly, then you have every right to complain. There are strict rules concerning how lenders should deal with complaints as mortgages are regulated by the FSA. 

In addition to the rules, the regulator offers examples of good and poor practice on its website. For example, it is good practice for the lender to offer you options that are realistic to your circumstances and budget, with the aim of enabling you to remain in your home. Options can include offering you temporary reduced payments or a payment holiday, changing the term or repayment type of your mortgage, or capitalising the arrears.

Meanwhile, it is poor practice if court action is taken where a reasonable negotiated settlement is possible, or is used as a measure to discipline you into keeping to agreements to repay arrears. 

If your lender breaches the rules on arrears you can first complain to them directly and then to the Financial Ombudsman Scheme.

Take action now

If you've not yet fallen into arrears, but are worried you might in the future, there are steps you can take now to ensure you don't suffer the stress, hassle and costs of repossession.

Save as much as you can

Perhaps you're on an affordable rate now, but are concerned your rate will increase when your current deal ends and you come to remortgage. This is a legitimate fear as rates have increased substantially over the past year. So don't bury your head in the sand. Plan ahead, and save as much as you can now to prepare yourself for the tough times ahead. If you can pay off a portion of your mortgage when your current deal ends, you could qualify for a cheaper rate. This strategy will also ensure you get used to living on a tighter budget.

Take out insurance

Critical illness cover and income protection insurance are worth thinking about if you can afford them. These types of insurance policies protect provide a payout in the event of an accident or ill health.

Get flexible

Check whether you are on a flexible mortgage deal. With these deals, you can overpay in the good months and build up a buffer for when times get tight. If you lose your job for example you could underpay, take a payment holiday or even borrow back some of your overpayments.

Talk about your problem

If you think you might have problems paying your mortgage, contact your lender straightaway. They will be able to look at different payment options which might include a payment holiday, or deferring the interest or capital. It's essential that you show a willingness to tackle the problem and get back on track with your mortgage. The FSA has produced a useful guide on what action you should take if you can't pay your mortgage including contact details of organisations that can help you work through your debt problems.

More: Use This Mortgage To Crack The Credit Crunch | If you need to remortgage speak to a broker at The Motley Fool Mortgage Service