What are mortgage arrears

Mortgage arrears are when you do not make the minimum monthly repayment on your home loan.  These include missed repayments as well as late or overdue repayments.

 

Late repayments vs Arrears

A late repayment is one where you were late on making the repayment.  That is, you didn’t pay it by the due date, but you subsequently did make it prior to the next due repayment.  Think of arrears as payments that you didn’t pay on time but haven’t subsequently caught up on – that is the mortgage is then behind – or in arrears.

Late repayments can be quite common.  Some examples of why you might have a late repayment include having your salary hit your account slightly later than normal or not transferring your repayment into the regular account in time. 

In contrast, arrears are seen as a higher risk indicator.  This is because you haven’t made up the repayment prior to the next one being due.  This can be an indication of financial stress.  Mortgage arrears may arise due to serious changes in your circumstances such as serious illness, losing your job or even legal advice after separation.

 

The impact of mortgage arrears

Just as with repayment defaults, debt agreements and writs/court judgements, mortgage arrears can make it much difficult to obtain finance.  Most mainstream lenders don’t like to see late repayments, let alone mortgage arrears.  A late repayment can make it difficult to obtain a refinance.  Furthermore, if you have mortgage arrears, your only real option is to look at a specialist non-conforming lender since mainstream lenders will see too much risk once you are in arrears.

 

Options if I’m struggling

The first thing you should do is contact your lender and let them know your circumstances.  All lenders would prefer to work with you to help you overcome your issues rather than looking to repossess your home.

If you don’t contact your lender, they will eventually contact you regarding your missed repayments and issue you with a default notice requesting you catch up with your repayments within a certain timeframe.  As mentioned in another article they may even list your debt in default after a period.

In a worst-case scenario where you cannot make up the repayments within their timeframe, they may begin the eviction process and initiate court proceedings.  Then they would repossess your home to sell it and attempt to recover any outstanding debt.

 

Refinancing when in mortgage arrears

Another option is to try and refinance your home loan as soon as it looks like you are going to fall behind in repayments (or if you have already fallen behind).  Usually, most people will have other debts with high interest that make the situation even worse.  Examples would include credit cards or personal loans. 

Sometimes the repayments on these high-interest debts can squeeze the household budget and some relief would be gained by rolling those debts into the mortgage – even if the new rate is slightly higher than the existing mortgage rate.  When household budgets are getting squeezed the most important figure is the monthly repayment as opposed to the home loan rate.  It is possible to pay less each month even with a higher home loan rate and this will provide breathing space until you can get back on track.

 

Mortgage Arrears Calculator

One big advantage with non-conforming specialist lenders is that they have an approach to late repayments and mortgage arrears that can potentially benefit many clients.

In the table below the minimum monthly required repayment is $2,000.  You will notice that the client has only managed to make this repayment in 1 of the last 6 months – the repayment from 6 months ago.

 

Month

Amount Paid

Monthly Payment

Monthly Arrears or Advance

Cumulative Arrears or Advance

Full Payments Arrears or Advance

1

2,000.00

2,000.00

0.00

0.00

0.00

2

1,800.00

2,000.00

200.00

200.00

0.10

3

1,500.00

2,000.00

500.00

700.00

0.35

4

1,500.00

2,000.00

500.00

1,200.00

0.60

5

1,600.00

2,000.00

400.00

1,600.00

0.80

6

1,800.00

2,000.00

200.00

1,800.00

0.90

 

In months 3 and 4 they really struggled and were $500 short in each month.  However, at the end of this 6-month period the total cumulative arrears are only $1,800.  This is less than 1 full repayment and there are specialist lenders that will consider the client to not yet be in arrears at this point. 

However, bear in mind that if next month they only make $1,700 in repayments, then the cumulative arrears will hit $2,100 which is more than 1 monthly repayment.  They will be in 1 month’s arrears at that point.  This would result in a higher interest rate if they were successful in refinancing. 

Lenders will usually increase the interest rate available based on the number of months in arrears.  The treatment will depend on the lender and two examples are:

 

Lender A

None

< 1 month’s

<3 month’s

unlimited

Lender B

None

< 1 month’s

<2 month’s

<3 month’s

 

In this case, if you had more than 3 month’s arrears then Lender A would be the preferred lender.  This will come at the cost of a higher interest rate, but it just may be what you need to keep your home.  There are multiple lenders operating in this space with flexible policies and the best one for you will depend on the circumstances you find yourself in.

 

Conclusion

Mortgage arrears (and to a lesser extent late repayments) can limit your ability to obtain further financing by reducing your credit score.  Unfortunately, this is usually the time that having access to further financing opportunities can provide you with much-needed relief.  The important thing is to address this with your lender as soon as it looks like becoming an issue. 

A good solution is to enter a debt consolidation refinance with a specialist lender and combine your high interest rate debts with your mortgage.  Furthermore, there are lenders that have flexible policy that may not even consider you to be overly credit impaired if you seek advice and assistance early enough.

We have recreated the mortgage arrears calculator below for you to see how your situation may be viewed.  But if in doubt please contact us as soon as practical so we can investigate some options to provide you with breathing space.