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If you’re in arrears on your mortgage, your lender may have charged you too much

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An investigation by the financial regulator, the Financial Conduct Authority, shows that at least three quarters of a million mortgage customers may be being charged too much after they got into arrears on their mortgage.

Q. What’s the problem?

A. If you get behind with your mortgage and build up arrears, your mortgage lender may let you pay back the arrears over a period of several years. You normally have to make the usual mortgage payments, plus a bit extra every month until the arrears have been repaid.

The Financial Conduct Authority (FCA), has found that at least 750,000 people could have been paying too much on their mortgage, because their mortgage lender made a mistake with the way their repayments have been worked out.

Q. How much difference could this make?

A. I’ll be honest – it’s a bit complicated and the easiest way to explain it is with an example (this is how the FCA has explained it in its press release). So:

  • Suppose you have a repayment mortgage for £200,000. You’re being charged interest at 3% and you pay £1,109 a month.
  • You get into arrears when you lose your job, and you build up £5,000 of arrears.
  • Once you’re back in work, you reach an agreement with your mortgage lender to pay back the arrears at an extra £208 a month. That means you’re paying £1,317 a month.
  • After a while your 3% fixed rate deal runs out and you move onto your lender’s standard variable rate of 3.25%.
  • Your mortgage lender has to work out how much you need to pay each month to make sure you can clear your mortgage in time.
  • The mortgage lender includes the arrears amount in the mortgage payment calculation, which means that you are asked to pay off £1,185 a month. This includes an amount to repay the arrears.
  • However, the mortgage lender also continues to ask you for an additional regular monthly payment to clear the arrears.
  • As you can only afford to pay £1,312 every month, it means that £132 is going to clear your arrears (even though you’re also paying off your arrears as part of your new monthly payment).
  • In three years, you have cleared your arrears, but your mortgage lender continues to ask you for £1,185 a month, even though you don’t owe a penny in arrears.

The FCA says that the mortgage lender should not have included the arrears in the new mortgage payment. If it had not done this, you would have been able to clear your arrears sooner, because £162 a month and not £132 could have been used to repay them (£1,185 minus the correct monthly mortgage payment of £1,155). In that case you’d be able to clear your arrears in 2½ years and not three if you’d been charged the right amount.

Q. What happens next?

A. The FCA is consulting on new rules which mean that the arrears wouldn’t be automatically added to the mortgage amount. It also says that mortgage lenders may have to pay affected customers compensation.

Related articles:

Mortgages for over-65s – getting a mortgage if you’re an older borrower

Understanding different types of mortgage. A guide to fixed rate, tracker, discount, variable and capped mortgages

How to find a good mortgage broker

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