Help with mortgage problems

Megan Lloyd rounds up the options available for people struggling to afford their mortgages, and the Financial Conduct Authority rules and guidance available to support them.

With the rise in interest rates, you may be seeing more clients with arrears on mortgages and secured loans. Even for those not in arrears, higher payments may be putting strain on their ability to manage their finances or other debts. Support is available for clients in both situations, and we’ll look here at the various measures available and where you can find them. You should also look at a client’s specific mortgage agreement, as they may have contractual options, for example payment holidays or deferrals.

The Financial Conduct Authority’s (FCA’s) Consumer Duty — Principle 12: ‘a firm must act to deliver good outcomes for retail customers’ — will be very relevant for clients in financial difficulties, and an important consideration for lenders. We won’t be talking about it in detail, but for more information on using the Duty to support your clients, you can read our article: The FCA consumer duty — what this is and how advisers can use it.

Principle 12 has now replaced principle 6 (to treat customers fairly) and principle 7 (information and communication needs of clients). The pieces of FCA guidance below were produced before the Consumer Duty, so if you quote them when you write to lenders you can update references to principles 6 and 7 with references to principle 12.

Advice boundaries

Debt advisers can provide information on what options lenders should consider, but you can’t give regulated financial advice, for example recommending particular contract variations. You could suggest a client speak to an Independent Financial Adviser if they need more support around this, although there’s usually a cost for this. Citizens Advice has some information on accessing independent financial advice.

Relevant FCA guidance

Guidance for firms supporting their existing mortgage borrowers impacted by the rising cost of living (FG23/2)

For an overview of options and expectations, this March 2023 guidance, also known as FG23/2, is the one to read first — it sums up most of the relevant FCA regulations and guidance, tells you where you can find them, and is relatively short.

It also strongly reiterates the expectation for lenders to provide both forbearance for customers in financial difficulty and support for those wanting to reduce monthly payments, and goes into detail about the need for lenders to go beyond the basic regulatory requirements.

The Mortgage Charter

The Mortgage Charter was introduced in June 2023 by agreement between the FCA, the government, and most mortgage lenders. Lenders who have signed up to the Charter have agreed to offer some important support measures. These lenders have signed up to the Charter and cover over 90% of the mortgage market.

The support available depends on your client’s position.

If they haven’t missed any payments, they can:

• ‘Lock in’ a mortgage deal up to six months before an existing fixed-rate deal ends. They can also request a better deal with the lender during this period if one becomes available.
• Switch to interest-only payments for 6 months without an affordability check
• Extend the mortgage term to reduce payments, with the option to switch back to the original term within 6 months without an affordability check

Switching to an interest-only mortgage or extending the mortgage term will have long term implications for a client, and you should advise them to get independent financial advice if possible. Lenders will still need to carry out affordability checks if a client wants to switch to interest-only permanently, or extend the mortgage term past their expected retirement date.

The Charter doesn’t add much more to existing support for those in arrears. Lenders signed up have agreed that:

• borrowers won’t be forced to leave their home within a year from their first missed payment, unless they consent or there are ‘exceptional circumstances,’ although unfortunately these aren’t defined.
• lenders should offer ‘tailored support for anyone struggling’
• options will depend on the client’s circumstances.

The Mortgages and Home Finance: Conduct of Business sourcebook (MCOB)

MCOB contains the main regulatory requirements for mortgage lenders, with MCOB 13.3 covering the policy and procedures for dealing fairly with customers with a payment shortfall. These are regulations, so lenders must abide by them, but the FCA have been clear that the MCOB provisions are very much a minimum standard, and firms are expected to go beyond them in acting fairly.

Mortgages and Coronavirus: Tailored Support Guidance (TSG)

The Mortgages and Coronavirus: Tailored Support Guidance (TSG) was originally issued to address exceptional circumstances due to coronavirus, but the FCA considers it’s also relevant for borrowers in financial difficulties because of other circumstances like the rising cost of living. The FCA is planning to withdraw the TSG once it’s brought some of the provisions into MCOB and the Consumer Credit sourcebook (CONC), but until then it’s still in place.

Guidance for firms on the fair treatment of vulnerable customers (VCG)

The FCA guidance for firms on the fair treatment of vulnerable customers (VCG) defines a vulnerable customer as ‘someone who, due to their personal circumstances, is especially susceptible to harm — particularly when a firm is not acting with appropriate levels of care.’ These circumstances could be personal characteristics like health conditions, or situational, for example following a bereavement.

The FCA considers low financial resilience to be a characteristic of vulnerability, including being over-indebted, or having a deficit budget, so this is likely to apply to the majority of our clients. Firms are expected to comply with the guidance and offer extra or different support to meet someone’s individual needs.

Research from November 2022 — Borrowers in Financial Difficulty

Borrowers in Financial Difficulty is a study, rather than guidance, but it’s one to read if you’re interested in the findings that inform some of the guidance. It also looks at debt advice, how clients are accessing this and issues they face.

A particularly interesting point is the finding that ‘40% of respondents believe that their credit file will be affected if they contact their lender,’ and the FCA advises firms to be clearer with customers that just talking to them won’t have an impact. Debt advisers can also help by making sure clients understand this, as it’s a big barrier for accessing support. Various options may have an impact on a credit report (which a lender should explain), but having a conversation won’t.

Key themes from all the pieces of guidance

Forbearance

When looking at options for helping customers who are struggling to pay, some will mean that the contractual monthly payment is varied, and others will mean the contractual payment stays the same but there’s an agreed plan to clear the arrears.

A key point to remember is that lenders have more flexibility when they’re varying a contract for the purposes of forbearance. Forbearance isn’t defined, but essentially boils down to providing support for customers in financial difficulty. The FCA talks about specific examples of forbearance, which we talk about below, but it’s clear these aren’t exhaustive. Measures shouldn’t be limited to what’s set out in the MCOB rules. Lenders may have set policies or requirements for variations, but these shouldn’t be rigidly followed. If forbearance is needed they shouldn’t be a barrier to the customer accessing options.

Firms should offer ‘prospective forbearance’ — this means they should also offer support to customers who’ve told them they’re in financial difficulties, even if they haven’t missed any payments yet. The FCA doesn’t expect firms to ask for evidence that the customer will miss payments before offering this (FG23/2 para 23)

Best interests

FG23/2 reminds lenders of their responsibility under MCOB 2.5A to act ‘fairly and in accordance with a customer’s best interests.’ This will now be reinforced by the Consumer Duty — ‘A firm must act to deliver good outcomes for retail customers’ — and the associated rules around acting in good faith and avoiding foreseeable harm.

Lenders need to take account of a client’s wider circumstances and any potential changes to those circumstances. This includes considering whether they have other priority debts and the potential consequences of these, especially when agreeing a repayment plan — this is in para 5.4 of the TSG. You can support your clients to communicate this to lenders along with their financial statement.

Communications and reviews

When considering options, the FCA expects firms to be transparent about what they can offer. They should be able to justify why they’ve offered a customer a particular option, (MCOB 13.3.4CG). They don’t have to provide advice, but do need to give customers adequate and timely information about their options and the consequences of these — for example the impact that deferring payments might have on the amount they need to pay back, and any implications for their credit record. Any fees or charges must be disclosed, be fair, and only cover the firm’s costs.

The TSG (paras 5.21–5.23) puts a responsibility on lenders to review arrangements regularly, and in response to any changes of circumstances. They should also review forbearance options when there are signs they aren’t working, such as customers failing to meet repayment arrangements, and explore alternatives as needed.

Second mortgages

The FCA notes (TSG paras 5.18–5.20) that second charge mortgages often have high interest rates, and charge compound interest on sums in arrears. This means there’s a high risk of the debt growing substantially if there’s a payment shortfall. Customers with second charge mortgages are also more likely to have characteristics of vulnerability, so it’s especially important for lenders to consider extra forbearance. Examples could be:

• Applying simple rather than compound interest to payment shortfalls
• Reducing interest rates on shortfalls, potentially to 0%
• Making sustainable arrangements to pay

Although these aren’t presented as things a firm must do, they’re clear indications of what the FCA considers reasonable.

Contract variations

The options firms should consider are set out in MCOB 13.3.4A(R):

‘Firms must consider whether, given the individual circumstances of the customer, it is appropriate to do one or more of the following in relation to the regulated mortgage contract or home purchase plan with the agreement of the customer:

(a) extend its term; or

(b) change its type; or

(c) defer payment of interest due on the regulated mortgage contract or of sums due under the home purchase plan (including, in either case, on any sale shortfall); or

(d) treat the payment shortfall as if it was part of the original amount provided (but a firm must not automatically capitalise a payment shortfall where the impact would be material); or

(e) make use of any Government forbearance initiatives in which the firm chooses to participate’

However, the FCA has made it very clear that it expects lenders to go beyond the MCOB requirements and give ‘all borrowers in payment difficulty appropriate forbearance that is in their interests and that takes account of their circumstances’ (FG23/2 para 17).

Affordability checks

MCOB 11.6 covers affordability checks, when they’re needed, and what lenders need to consider. MCOB 11.6.3 is an important regulation for existing borrowers, as it says that the requirement to carry out an affordability check doesn’t apply for varied or new contracts if (among other things):

• There’s no additional borrowing or any change to the terms that’s likely to be ‘material to affordability’
• The variation is made solely for forbearance where there’s a payment shortfall, or likely to be a payment shortfall

Whilst this will make it easier to access options from lenders, debt advisers should always support the client to assess whether they can afford payments, and advise accordingly, acting in the client’s best interests.

Extending mortgage term

Extending the term of a mortgage will spread remaining mortgage payments over more years. This will reduce the amount the client is paying every month, but will lead to paying back more in total, as extra interest will apply.

If your client isn’t in arrears, or isn’t in danger of missing a payment, but wants to reduce their monthly payments, firms can extend the mortgage term up to the customer’s expected retirement age without an affordability check if there aren’t any other changes to the mortgage terms (MCOB 11.6.3R). If the requested extension goes past the client’s retirement age, an affordability assessment is likely to be required (MCOB 11.6.4E). The Mortgage Charter also gives borrowers the right to switch the term back to the original length within 6 months without an affordability check.

If someone needs forbearance, then lenders can extend the mortgage term (including into retirement) without an affordability check (FG23/2 para 2.11).

Interest-only

Switching a mortgage to interest-only will reduce the monthly payments, as the client will only be paying the interest. At the end of the mortgage term, the capital amount borrowed will still need to be repaid, so to get an interest-only mortgage the borrower will usually have to show that they’ve got a solid plan to repay this.

For customers not in arrears, lenders signed up to the Charter will agree to switches of up to 6 months without requiring a plan. For those in difficulties, MCOB 11.6.43R gives lenders the right to agree to a temporary switch, although FG23/2 cautions that ‘a variation is unlikely to be considered appropriate and temporary if, after the temporary period is over, the customer is not obliged to make payments of interest and capital which are designed to repay the mortgage in full over the remaining term.’

If the switch to interest-only is permanent, lenders will still need evidence of a way to repay the capital at the end of the term (MCOB 11.6.41R).

Capitalising arrears

Firms can add arrears to the mortgage balance — essentially turning them into capital borrowing. This gets rid of the shortfall but will increase the monthly payments, because the client will pay back the arrears amount as part of their standard payments, and they’ll also pay interest on it going forward. This can be a risky strategy, and the FCA cautions that firms shouldn’t agree to capitalisation unless ‘no other option is realistically available to assist the customer.’ It’s most useful where the financial difficulties have been temporary, and the client can clearly show they can afford the increased amount going forward.

Switching interest rates

If the client isn’t in financial difficulty

In this situation the consideration is whether a change is ‘material to affordability.’ This means the lender should compare the current arrangement with the proposed new arrangement to work out if the change will mean a borrower has to pay extra every month, and whether that means they might not be able to afford it.

If someone is on a fixed term deal, when this ends they’ll automatically be transferred onto the lender’s standard variable rate (SVR), which is likely to be higher. If they want to get a new fixed-term deal, then instead of comparing the proposed payments under the new deal to the current monthly payments under the expiring deal, the lender can (and arguably should) compare them to what the borrower would actually be paying instead, which is the payments under the SVR.

Example

Miriam’s fixed-rate mortgage deal of 5% is coming to an end in 6 months. When this finishes, she’ll automatically be transferred to the lender’s standard variable rate (SVR), which is currently 8.4%. Her lender has a fixed-rate deal of 6.8% available which she would like to switch to.

Although 6.8% is higher than she’s paying at the moment, it’s still lower than the SVR. When thinking about whether the change is ‘material to affordability,’ the lender should compare the new deal of 6.8% to the 8.4% she would otherwise pay, not her current deal of 5%. As she’d be paying less under the new deal than the alternative, the change won’t be material to affordability.

If the client is already in financial difficulty

Whether they can get an interest-rate switch will depend on lender policy. The FCA has said they don’t prohibit this, and support lenders offering lower or fixed rates in these circumstances (FG23/2 para 69).

Other options

Forbearance isn’t limited to contract variations, and clients in arrears or financial difficulties should be able to access tailored support. Debt advisers will be familiar with some of these options, and you can find more detailed information in chapter 8 of the Debt Advice Handbook.

Payment Protection Insurance (PPI)

Clients may have PPI, either sold with the mortgage or separately. If they can claim, this might cover some of all of the monthly payments. It’s also possible the PPI was mis-sold. The deadline for claiming on policies sold before 29 August 2017 has now passed, but complaints may be considered in rare circumstances, and non mis-selling complaints (for example about insurers refusing to pay) are still accepted. You can read more on the Financial Ombudsman Service (FOS) website.

Support for Mortgage Interest (SMI) payments

If your client is on certain benefits they may be able to apply for SMI. Clients who qualify can get a monthly amount to help them pay their mortgage, but the amount paid to the client is a loan and not a benefit and must be repaid when the house is sold. The SMI loan is secured against the client’s home’ and interest is charged at a set rate. To find out more, and see whether your client would qualify, you can check the Citizens Advice SMI pages. Debt advisers can explain how SMI works but can’t offer advice on this option, as this would be regulated financial advice.

Negotiating reduced payments/interest/charges

The lender may agree to reduce payments, or to reduce, defer, or even waive interest and charges. This is only likely to be agreed if the financial difficulties are temporary, and there is a plan to resume payments in the near future — for example a client is going to start work in 3 months, at which point a repayment plan will be possible.

Negotiating a payment plan

Often described in debt advice as an arrangement for Contractual Monthly Instalment (CMI) plus arrears, this lets the client reduce the arrears over time by paying an affordable amount on top of their monthly mortgage payments.

MCOB 13.3.2A (3) states the lender should allow a reasonable time to pay off the shortfall, and the plan should consider the customer’s circumstances. In Cheltenham & Gloucester Building Society v Norgan [1995] EWCA Civ 11, a ‘reasonable period’ was held to be over the remaining term of the mortgage.

Time orders

The client may be able to access a time order under section 129 of the Consumer Credit Act, and if it’s granted, the court can set new repayment terms and lower interest and charges. Looking at this in detail is outside the scope of this article, as it’s a very complex area. If a client might be able to apply for a time order, it would be best to get specialist advice. Debt advisers can contact Shelter’s Specialist Debt Advice Service (SDAS) for support — please note clients can’t access this service directly.

Help to Stay Wales

The Welsh government operates a mortgage rescue scheme that clients in Wales may be able to access if they can’t pay their mortgage. Support available is an equity loan of up to 49% of the value of the property, secured against the home and paid directly to the mortgage lender to reduce the mortgage and monthly payments. The loan has a 15 year term, and no payments are due for the first 5 years. From years 5–15 payments of interest must be made, and the whole loan is repayable in year 15. This means a client will need to be able to make a lump sum payment at this point.

It’s not available for clients who have more than one charge on their property, and there are other income and property requirements. As part of the process clients must get debt advice, and also independent mortgage advice — the cost of this is covered by the scheme, even if the client then doesn’t proceed. You can find out more about the scheme and eligibility criteria in the Welsh government guidance.

Local council mortgage rescue schemes

Local councils in England and Wales may operate their own schemes, usually for those at risk of homelessness. Individual schemes will have different options and eligibility criteria, so you’ll need to contact your client’s local council directly for more information. You can find your client’s local council on the government website.

Selling the home

If your client can’t afford to stay in their home, they could consider selling it, as they’re likely to get a higher price for it than if the lender repossesses the property. This could mean they’re left with a lump sum (which could be considered in any other debt strategies) or reduce any potential shortfall debt. MCOB 13.3.2A (5) says that if no payment arrangement can be made, the lender must ‘allow the customer to remain in possession for a reasonable period to effect a sale.’ If there’s negative equity in the property then the lender will need to agree before the client can sell it, so they may have to negotiate.

If possession action is taken, the Court won’t normally agree to suspend this unless there’s enough equity to clear the debts (Cheltenham & Gloucester v Krausz and another [1996] EWCA Civ 780), however making a complaint may be useful — a FOS decision in 2020 found Landmark Mortgages didn’t act fairly and reasonably in refusing Mr and Mrs N permission to sell in this situation (Decision ref: DRN6286208).

Selling the home may cause issues for the client if they need homelessness support from the local council — the Debt Advice Handbook suggests agreeing the strategy with the council in advance, but in practice your client may need support from a housing adviser.

You should also check how the proceeds of the sale might affect any benefits your client is or could be claiming — chapters 22 and 23 of the CPAG Welfare Benefits and Tax Credits handbook 2023/24 contain information about how this might be treated. If the home has been sold at below market value then this may cause problems if the client goes bankrupt or applies for a Debt Relief Order in the future.

Sale and rent-back

A sale and rent-back scheme is where a company buys the client’s property, giving them a lump sum, and rents it back to them under a tenancy agreement lasting for a minimum of 5 years.

The FCA does regulate the sale and rent back market, and there are advising and selling standards in MCOB 4.11, however firms offering this option are extremely rare.

These schemes are risky, and have substantial disadvantages. After the initial 5 years there is very little security of tenure, and rent could rise at any point. The home will probably have been sold at below market price, potentially causing issues for insolvency options, and the client may struggle to claim benefits if the DWP or council decide they aren’t liable to pay rent — see p177 of the CPAG Welfare Benefits and Tax Credits handbook for more information on this.

Clients should also be wary of scams and unregulated firms — at the time of writing the FCA are prosecuting 3 people for running unauthorised sale and rent-back schemes, and have also warned about firms misrepresenting risks and targeting those in financial difficulty: Three individuals face charges for unauthorised sale-and-rent-back schemes. You can check whether a firm or individual is authorised on the FCA register.

Equity release

Usually only available for people aged over 55 or older, equity release allows a client to take out a lump sum from the equity in their property. The lump sum usually doesn’t have to be paid back until they die, move into long-term care or sell the home. This could be useful for someone who is ‘asset rich and cash poor,’ but these are complex financial products, and the client should be advised to get independent financial advice. You can also find some useful information on the Age UK website.

Taking action

Debt advisers can support clients by preparing a detailed financial statement, and gathering evidence to show their situation. It will be helpful to get the property valued if possible — the current lender may have a valuation, but this might not be up to date. You can help them to go through the mortgage statement and check this is correct, including whether there is any interest or charges that could be challenged. You’ll also need to talk to the client about what they want to achieve, including discussing sensitively whether this is realistic.

MCOB 13.3.2A (2) says that lenders should liaise with third party advisers if the customer makes arrangements for this, so you can negotiate on your client’s behalf if needed. Whether from you or your client, points to cover around their circumstances will be:

• A financial statement detailing income and expenditure
• Details of how they got into arrears or financial difficulties, especially where this is due to circumstances beyond their control, such as losing a job or becoming ill or disabled
• Any current or expected improvement in their financial circumstances
• Other priority debts they have, and the potential consequences of these — these will be on the financial statement, but it would be useful to highlight them specifically, given the guidance in the TSG
• If the client would be considered to be in vulnerable circumstances then evidence of this would be helpful, especially if any personal characteristics or circumstances have contributed to their financial difficulties, and you should highlight any particular support or communication needs to the lender, with the client’s permission
• It’s also important to address any issues on your client’s part. For example if they’ve broken previous payment arrangements because they were unaffordable, you can explain that now they’ve had debt advice they’re able to make a sustainable offer based on a more realistic financial assessment.

Negotiating points

If your client is able to afford payments, they should start making them as soon as they can, even if the lender hasn’t yet agreed. As well as reducing the arrears, it shows the client is serious about clearing them, and demonstrates that their strategy is affordable. This will help their case if the lender takes court action or a complaint is necessary.

If the client can’t afford the full amount, an option is to pay as much as they can afford. It’s important to think about this tactically, and take into account the longer term. It would help to demonstrate that they can afford a reduced amount if a switch to interest-only or a term extension is an option, and if income is expected to increase then it would help to keep the lender on side until this happens, but if the client is unable to afford to stay in the property there may be other considerations.

If income will increase, this is a good negotiating point, and the more certain this is, the stronger the client’s position will be — for example they’re about to start a new job, or other priority debts or attachments of earnings orders will be paid off, freeing up income.

If there’s equity in the property, you can point out that the lender’s security isn’t at risk. The more equity there is, the better the client’s position will be.

If the client is planning to sell the property and wants time to do this, evidence of their plans is useful, for example documents from estate agents, or property listings. A robust valuation will be important, especially if there’s negative equity.

If there are any concerns around the lender’s conduct, or the circumstances of taking out the mortgage, this might strengthen your client’s position in terms of a complaint. This could include:

• Mis-selling by the lender of PPI, or the mortgage itself
• Problems with any initial affordability assessment
• Whether your client was pressured into signing an agreement by anyone, or subject to any undue influence that the lender should have known about
• A failure to recognise that the client is in vulnerable circumstances, or to offer them support that meets their needs
• Refusing to deviate from a blanket policy — for example saying that all payment plans must clear arrears in 3 years or less

Conclusion

Lenders must always act fairly and in the client’s best interests, and they’re required to meet the Consumer Duty. In most cases they don’t have a duty to offer the client a particular option, but they do have a duty to consider those options, and to take into account the factors mentioned in any guidance when making their decision.

If lenders don’t follow FCA rules or guidance, the client could make a complaint, first to the lender and then to FOS if necessary. There’s more information about making mortgage complaints on the FOS website.

Key points to address will be the rules in MCOB, the pieces of guidance above and whether the lender has considered everything they need to take into account, including the client’s circumstances.

FOS will make a decision based on whether the lender has acted fairly and reasonably, which can produce a better outcome for the client than court proceedings, as breaches of FCA rules aren’t in themselves a defence to possession (Thakker v Northern Rock [2014] EWHC 2107 (QB)). Section 8 of the Mortgage Pre-action Protocol says that the lender should consider postponing a claim if the borrower has made a genuine complaint to FOS. If they don’t, they should give notice explaining why.

If the lender does take possession action then legal advice is recommended. Your client might be able to access this through insurance policies, union or other memberships, or may be eligible for legal aid — you can find some information on the possibilities on the Citizens Advice website.

Free support is also available for clients at risk of losing their homes from the Housing Loss Prevention Advice Service. They provide early legal advice and on the day emergency advice and representation at court, and you can find a list of providers on the government website.

Megan Lloyd works as a debt expert in the Expert Advice team at Citizens Advice.

The information in this article is correct as of the date of publication

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