Mortgage arrears and post completion

Section1

Further advances and remortgaging

A further advance is a ‘top up’ loan to an existing borrower.

The lending market is now highly competitive. There is no guarantee that the original mortgage lender will be an automatic choice when additional finance is required. Nevertheless, all lenders actively pursue this type of business as their records can often identify high quality lending opportunities.

The FSA Mortgage Conduct of Business Rules applies to further advances as well.

There are many lenders looking for customers who want to top up their borrowing, sometimes for home improvements and other matters relating to the property. Mainstream mortgage lenders, especially building societies and banks, can often provide funds at lower interest rates and fees than these. Mortgage advisers should therefore be vigilant in looking for opportunities to secure good quality lending business from existing clients. In many cases, they will also be doing these clients a favour by making funds available at lower cost.

In addition to the main retail banks and building societies, there are several other groups of institutions that are prepared to supply finance, including insurance companies and finance houses.

It is worth reading your own organisation’s product literature on further advances alongside this section of the text, as well as collecting information from competing institutions.

This is the first stage in the further advance process. There are two aspects:

The first of these is concerned with borrower status. The second involves re-assessing the property to ensure that it continues to offer sufficient security in keeping with prudent lending practice and the policy of the financial institution.

Information can be gathered by:

As with a mortgage for house purchase, exactly the same checks have to be considered to confirm the information submitted in support of the application.

The Consumer Credit Act 1974 requires lenders to determine the purpose of any loan of £25,000 or less in order to ascertain whether it is regulated by the Act or not.

If the loan is for £25,000 or less, it is regulated unless exempt.

If the loan is over £25,000, it is unregulated.

A loan is exempt if:

The Act only affects loans to personal borrowers.

Loans for mixed purposes are usually separated into regulated and non-regulated elements, as the procedures are different for each.

Most residential mortgages are exempt from the provisions of the Consumer Credit Act 1974, but watch for the exceptions.

It cannot be assumed that the borrower has the same or a better income than when the original advance was granted. Income and occupation have to be checked in respect of every party to the mortgage.

The lender has to obtain comprehensive details of regular and irregular expenditure. Of particular concern are other borrowings as well as normal household expenditure.

Lenders will usually reduce the amount they will lend to take account of a customer’s other loan commitments.

If a customer’s outgoings seem on the high side, one option might be, on repayment mortgages, to consider extending the term of their existing mortgage so as to reduce the monthly payments.

An assessment has to be made of overall family circumstances. The number of dependants will often affect the ability to repay the loan.

Since the original advance was made, one party may have left the home or others may have moved in. If the former applies, it is unlikely that the person who has left would take on an additional debt burden with no benefit. In the latter case, the lender will require a ‘consent for mortgage’ form to be signed by the person who is not a party to the mortgage, to waive rights of residence. Unless the opportunity is taken to add their name to the mortgage deed their income might be useful. Even if the income is not required they would need to have a credit reference check.

It is necessary to look at the account history to see that the applicant for the further advance has been a good payer – this can be readily established by looking at the records. Many lenders adopt a practice of insisting that arrears be cleared before a further advance is considered, no matter how small or insignificant these might appear.

The size of the loan will be constrained by value. Since the original loan was granted, the property may have increased or decreased in value. Even if work has been done to improve the dwelling there is no guarantee that this automatically enhances the value.

If the original loan-to-value figure was high, it may be necessary to commission a new valuation to determine whether the property offers sufficient security for the higher borrowing commitment. In other cases it may be obvious that the property is adequate as security.

Many further advances are for home improvements. In such cases, the lender may be prepared to consider the enhanced value of the property once the work has been completed. Before doing so, plans and estimates will be required and, in case of some structural alterations, evidence of planning permission. Work may be subject to final inspection by a suitably qualified person.

Since the property slump of the 1990s confirmed that the value of property can fall as well as rise, it cannot be automatically assumed that an existing mortgaged property will necessarily have increased in value since the original mortgage was granted.

The overall loan-to-value ratio is the most crucial determinant here. This is the outstanding debt plus the further advance as a percentage of the value of the property.

Property experts regard location as the most critical determinant of property value. This needs to be assessed from a long-term viewpoint. Is the area new or mature? Is it improving or declining? What plans are in place to develop infrastructure and local amenities? Are there imminent plans to build roads or housing estates that might increase or reduce eventual value?

In a ten-year period, one village in the Midlands experienced the following changes:

• a new ring road constructed less than half a mile away;

• a sewage plant constructed adjacent to the village;

• a juvenile remand home opened less than half a mile away;

• high density local authority housing erected in the village, eliminating its ‘exclusive’ image to potential purchasers.

. . . yet mortgages can be in existence for 20–30 years!

As mentioned above, if the loan is for improvements or repairs, these have to be consistent with conditions imposed by local authorities or national town and country planning legislation. Failure to take sufficient account of these factors can result in work being carried out, only to have the local authority impose an enforcement order to undo what has been done.

Mention has been made of specific obligations of building societies under the Building Societies Act 1986 (as amended by the Building Societies Act 1997) to assess the adequacy of security for each and every mortgage to be secured on land. This does not necessarily mean that a new valuation should be made for all applications; societies can satisfy their statutory obligations as long as an assessment is made, which may or may not require a valuation to be carried out (ie, they may be happy to assess the further advance based on the original valuation, if it is not too old). If in any doubt, however, the society will instruct a valuer to make an inspection to make doubly sure they are in full compliance with the law. Other lending institutions have no similar statutory duties: their engagement of the services of valuers is purely a matter of prudent lending practice.

Most home improvements should add value to the property, but they will not do so proportionately – some enhancements are better investments than others. If £10,000 is spent on improvements, it will rarely add £10,000 to the market value of the property.

The lender has to balance two sets of factors that can conflict:

Generally, it is necessary to consider further advances in the context of the overall risk exposure of the institution. This implies treating the application in much the same way as the original loan.

Although marginal mortgage applications can often be appealing to the lender because of the prospects of lucrative future cross-sales of mortgage-related services, this is not necessarily a good reason to lend in itself. Short-term gains from commission earnings can quickly be eroded by longer-term losses arising from default.

When a further advance is made, it enables the lender to reconsider the conditions applicable to the entire lending agreement. Such conditions might be:

A second charge is a right over the mortgaged property exercised by a lender subsequent to the first mortgagee. A legal mortgage that does not enjoy the security of the deposit of title deeds is known in law as a puisne (pronounced ‘puny’) mortgage. Most of these loans are made by banks and finance houses. Building societies are constrained by law on the amount of lending they can do in respect of properties subject to second and subsequent charges.

A puisne mortgage is a legal mortgage where the title deeds are not held by the lending institution.

The priority of legal mortgages is governed by the Law of Property Act 1925, which states that the priority is determined by the date of registration. If lender A advances £20,000 on a property worth £40,000 on 1 August 1993 and lender B enters into a secured arrangement for £10,000 the following year, clearly lender A’s mortgage has priority over that of lender B. In the event of default, A would be repaid first and so incurs lower risk. If lender A makes a further advance of £5,000 two years after the original one, however, this £5,000 would take third priority after the original two loans – effectively, a higher risk than both.

Lender A may not be prepared to take his place in a line of mortgagees due to the increasing risk of being paid out last. In some instances, it will persuade lender B to postpone its prior charge in favour of the new one – if he does not agree, lender A may offer a mortgage to consolidate the whole debt and lender B would lose out altogether. To set aside a second charge, a deed of postponement has to be executed.

The process of adding a subsequent mortgage to an original one having postponed an intervening second charge is called ‘tacking’.

The only exception to the priority rule occurs when an original mortgage deed obliges the lender to make subsequent loans. Here the original mortgagee takes priority, irrespective of dates of subsequent charges.

One example is a relatively new type of loan that permits a form of revolving credit to be drawn down over and above the amount of the main mortgage. For example, borrower X obtains a mortgage from lending institution Y comprising:

As the mortgage deed commits the lender at the outset to a whole series of subsequent advances, they are all first mortgages and lender Y will have priority over second charge holders.

The ranking of securities is governed by the Conveyancing and Feudal Reform (Scotland) Act 1970. The holder of a first security receives notice of a second or subsequent (postponed) security. The previous ranking of the prior lender is then restricted to cover his existing advances, interest and expenses. However, the provisions of the act may be varied between the debtor and creditor by a ranking agreement.

If the existing mortgage exceeds the loan-to-value ratio threshold (typically 75%) for the higher lending charge, a further advance will increase the exposure of the lender, requiring a new higher lending charge to be written. This will require an additional premium to be paid by the borrower (or debited to the mortgage account).

The further advance may take a loan that is not currently subject to a higher lending charge above the threshold. In this instance, it will be necessary for the lender to require a higher lending charge policy to be written, with the premium payable by the borrower or debited to the account.

Quite apart from higher lending charge considerations, many lenders have different policy criteria applicable to mortgages in excess of a specified loan-to-value figure.

The self-build borrower has to get involved in many activities that do not affect those buying ready-made properties, including:

• drawing up plans;

• liaising with local authorities;

• installation of utilities, such as electricity, gas and water;

• budgeting the project.

The reward is a purpose-built house to suit individual needs, often at a lower overall cost.

A major concern to the mortgage adviser is assessing whether the applicant has the determination to see the project through.

Further advances for home improvements or alterations are made subject to the ability of the borrower to obtain all necessary planning consents. Planning regulations are contained in a number of pieces of legislation, primarily the Town and Country Planning Act 1990.

Town and country planning legislation is complex but much more far-reaching than the layman might perceive. Anything that changes the external appearance of a property substantially is likely to require approval. Typical work that would require planning permission would include:

The examples given are by no means exhaustive.

The general procedure for seeking planning permission is:

A serious situation would arise if a borrower made substantial alterations to a property, funded by a further advance, only to find that the local authority does not accept the work and forces the borrower to change the property back to how it was. Further, if the borrower defaults in the meantime, the lender can be left with a property that is not saleable because it does not comply with planning laws and is subject to an enforcement order. This can result in heavy expenditure by the lender, which it may not be able to recoup from the borrower.

Listed building consent is required where the owner wants to demolish a listed building or change or extend it in a way that would affect its character as a building of special architectural or historical interest. Such work is covered by statutory legislation – primarily the Listed Building and Conversation Area Act 1990.

The procedure for seeking permission to alter or demolish a listed building is similar to obtaining planning permission. The listing applies to the building and anything attached to it and any buildings in the grounds. It should be recognised, however, that some of the requirements may be very detailed.

Grade 1 buildings are of exceptional interest and represent 2% of all listed buildings.

Grade 2 buildings are of particular importance and represent 4% of all listed buildings.

Grade 3 buildings are of special interest and represent 94% of the total number of listed buildings.

Proposed changes to Grade 1 and 2 buildings will involve National Heritage and various historical societies. The Secretary of State will be informed once a local authority has reached a decision relating to the proposed demolition of a listed building and any alteration to a Grade 1 or 2 building. Owners should also be aware that they may be required to carry out repairs as dictated by the local authority.

If work is not being carried out by a member of the NHBC, the lender will require work to be signed off by a professionally qualified architect. This confirms that the job has been done to a required standard. Typically, either an architect or surveyor will be appointed to oversee the work whether or not the work is carried out by an NHBC member.

The architect’s costs can be substantial, and are, of course, the responsibility of the borrower. A typical fee is 12.5% of build cost. This can increase as the level of supervision increases.

When a new person moves into a property they are not, of course, usually party to any existing mortgage. Consequently, when a further advance is made the lender has two options:

If the mortgage adviser becomes aware of a tenant living in the property, under no circumstances should the status of the tenancy be recognised formally – this can affect the ability of the lender to obtain vacant possession in the event of default.

If a customer wishes to borrow further money there may be options other than a further advance. For example, if a customer has a draw down mortgage it may be possible to draw down the required funds, or if they have a flexible mortgage it may be possible to miss some mortgage payments and accumulate the money in this way.

A remortgage is simply a replacement loan for one already in force. The existing loan may be with the lender carrying out the remortgage or with a different lender.

The need for a remortgage from the same lender is rare. Nearly all mortgage deeds have clauses whereby a further advance can be made without having to draw up a new deed. Where such a clause does not exist, it is often possible to create a deed of further charge supplementary to the original.

Where a remortgage is required to repay a different lender, several matters must be considered:

The procedure for remortgaging is relatively straightforward and mirrors in many ways the normal mortgage application procedure:

Remortgaging can be a painless way of raising extra money, and the costs can be reduced by taking a deal that offers free valuations and legal services. However, the borrower should be aware of the following issues before remortgaging.

Section 2

Arrears, debt management and recovery

Lenders must do all they can to help borrowers try to bring their mortgage accounts to order. The assistance that can be provided can take the form of short, medium or long-term measures. Short-term measures are those which are taken prior to litigation, usually when the account is between one and three months in arrears. Medium-term measures are those introduced once litigation has commenced, and may be applicable for cases with up to 12 months arrears of repayments. Long-term measures are those that attempt to restructure or reschedule the loan over a longer term.

A lender must write to a borrower within 15 days of it becoming aware of the account being in arrears. The letter must contain:

If it appears that the arrears situation can be retrieved the lender has many options.

Here the borrower agrees to clear the arrears by paying more than the monthly instalment for an agreed period. This may be possible, for example, when a period of unemployment is followed by the borrower taking a job at a salary level that can sustain the increased monthly payments.

Most lenders want to help borrowers but cannot do so indefinitely. It is therefore vitally important to:

The courts can take a more generous view of the rescheduling period, sometimes expecting the lender to permit up to four years (or even more) to bring the account to order. Courts have the power to do this under the Administration of Justice Act 1973.

The borrower can be helped to put his mortgage account back on track if a representative of the lender works through the household income and outgoings in a thorough and logical way. Many experienced debt counsellors find that borrowers get into financial difficulties because they are unable or unwilling to take time to plan their budgets and prioritise payments due to others. Some lenders have pro forma budget aids for use by debt counsellors: others use outside specialists who are either independent and experienced practitioners or established firms working in this field.

If this type of arrangement is permitted it should be fully documented for internal records, and confirmed to the borrower in writing. If the arrangement is not maintained the existence of such documentation is crucial in enforcing the mortgage through litigation.

This solution is chiefly used where the mortgage is on a capital repayment basis, where there is already a reasonable amount of equity (and therefore security) in the property and where the lender believes that the borrower’s personal and financial circumstances merit it.

It is essentially a short-term measure whereby the lender grants a payment ‘holiday’ or partial suspension of monthly payments. Arrears will therefore build up over the period of the ‘holiday’ or suspension, which the borrower will be expected to make good within a set time after the end of the concessionary period. For this reason, the lender will need to be confident of the borrower’s ability not only to service the normal monthly payments but also the additional payments necessary to clear his backlog. If he has already fallen behind on the basis of the standard monthly payment, what changes to his income or spending habits will need to be in place to enable him to bear the additional payments at a later stage? If the reason for his having fallen behind relates to a one-off set of circumstances which were beyond his control, and which are not expected to recur, the lender may be inclined to be sympathetic – and to be more optimistic for the success of this option.

If the loan is a capital and interest mortgage, the lender may be prepared to accept interest payments only for a specified period. Many loans are, however, set up on an interest-only basis already, which renders this option inappropriate.

One problem with interest-only payments is that in the early years of a capital and interest mortgage most of the monthly repayment is made up of interest. The concession of removing the capital element might, therefore, be worth very little.

A lender would therefore need to weigh the merits of this course of action: will any real benefit accrue to the borrower on a monthly basis if the capital element of the loan is at this stage only small? What are the prospects for recouping the deferred capital payments at a later stage?

The mortgage account can be put back on course by extending the term. This could either be on a short-term or long-term basis.

In the longer term, a customer with a ten-year term mortgage could extend it to, say, 35 years so as to reduce the payments. Alternatively, the lender could accept payments of ‘interest-only’ for a period.

This option is used with great care by lenders. The borrower has to be genuinely committed to keep the account on course. It cannot be repeated time after time.

With-profits endowment mortgages cannot usually have their term extended as they mature on a particular date. Newer versions of the product, including unit-linked and PEP mortgages, can usually have the term extended without difficulty. This is because the investment products are open-ended and do not rely on a set maturity date.

A lender could also agree to capitalise the arrears. For example, a mortgage of £50,000, but with £2,000 arrears (balance outstanding £52,000) could have the arrears effectively built into the loan, making it now a loan of £52,000 but with no arrears. This might be suitable where a customer has gone through a difficult period (say unemployment) but is now able to make full monthly payments again, albeit that they are now slightly higher. However, most lenders would regard capitalisation of arrears as a ‘one-off’ remedy, not usually to be repeated.

In serious default, this is often done as a matter of course, as many lenders have the endowment policy assigned to them. If the policy has not been assigned, this cannot be done. There will also be a fair chance that the assurance policy will have lapsed already if the borrower is in financial difficulties.

It is not good investment practice to surrender a life assurance policy very early. Nearly all policies are geared to long-term capital growth and perform badly over short periods. Nevertheless, early surrender is a way of obtaining capital in a hurry. In such cases, however, financial advice should always be sought.

A disadvantage of surrendering the policy is that the loan is converted to a capital and interest repayment mortgage. Payments will increase and alternative life cover needs to be arranged.

Some life assurance companies allow borrowing against the surrender value of the policy rather than see the policy surrendered. Another option is to sell the endowment policy in the secondary market. This can sometimes be a better option than surrendering the policy. There are now a number of specialist intermediaries who can arrange the sale of second-hand endowment policies, or traded endowment policies as they are sometimes known (or SHEPs and TEPs for short).

If the borrower has a commitment that simply cannot be sustained, the best option may be to trade down to a cheaper property. Often the lender will suspend litigation proceedings if there is a genuine attempt to sell the property with a view to buying a cheaper one. This action will release equity to not only remedy the arrears situation but also perhaps place a sizeable deposit for a subsequent purchase.

Borrowers in difficulty are not the only ones who trade down.

Until recently the most common incidence of trading down was older people retiring to a smaller home once the children had grown up. This practice may be the trigger for several other needs, as trading down can release equity for investment or income generation as well as create a whole new set of personal circumstances.

Before any of these options can be considered, it is necessary for the lender to urge the borrower to take early action to discuss the specific problems relating to the conduct of the mortgage account. Quite often, the borrower will feel intimidated about coming to the office to discuss arrears problems, so the lender may have to follow up standard letters by telephone calls to bring about an early interview. Many lenders are prepared to arrange home visits by trained debt counsellors to discuss the situation in the borrower’s own environment.

A lender could consider allowing a customer to rent out a room of their home to generate more income. However, care would need to be taken to ensure that a tenancy with rights of occupation was not created.

For those who are unemployed, the government provides assistance by way of Income Support. To qualify for this, the borrower must have no more than £8,000 in savings. Only the first £100,000 of a loan qualifies for Income Support assistance.

Government support for those in difficulty with their mortgages has gradually reduced over the last 20 years, creating problems for both borrowers and lenders. Moreover, the full extent of the effects of reductions in ISMI have yet to be felt.

Income Support regulations were changed radically in October 1995 by the Social Security (Income Support and Claims and Payments) Amendment Regulations 1995. The following key features of the system were introduced:

• borrowers with a new loan after 1 October 1995 are deemed to have ‘new housing costs’; they do not receive Income Support for their mortgage interest during the first 39 weeks of a claim. The full entitlement is paid from week 40;
• borrowers with a mortgage prior to 2 October 1995 are deemed to have ‘existing housing costs’. Income Support is not paid during the first eight weeks of the claim and during the following 18 weeks only 50% of the entitlement is paid. The full entitlement is paid from week 27;
• all payments of Income Support for mortgage interest are paid direct to the claimant’s lender participating in the mortgage direct payment scheme;
• borrowers over 60 years of age are not subject to these time restrictions but are subject to the standard rate without having to wait 39 weeks;
• all payments of Income Support are calculated using a standard rate of interest and adjustment is triggered by a 0.25% movement in the official average rate, calculated using the building societies rate of interest as reported in Table 7.1 of the Office for National Statistics (ONS) Financial Statistics;
• restrictions are imposed on the payment of interest on loans taken out for major repairs and improvements. Income Support is now payable on loans used to finance work carried out to maintain a property’s fitness for occupation. This will rule out the majority of further advances;
• a borrower who has already served the waiting period and then ceases to claim benefit for up to 12 weeks will not have to serve a further waiting period at the start of the second claim;
• Income Support for mortgage interest is not payable on arrears which accumulate during an exclusion period;
• from 2 October 1995, claimants have received Income Support on mortgage interest at the actual rate charged where this is below 5%. Where the rate is between 5% and the standard rate, Income Support is paid at the standard rate;
• an exclusion period in respect of Income Support for mortgage interest will commence on a claim for either unemployment benefit, statutory sick pay or incapacity benefit, regardless of entitlement to Income Support, or in other cases the date of an initial claim for Income Support;
• payments not eligible for Income Support include:

• deferred interest in certain cases.

• Where the claimant is receiving ISMI and is about to start a job that will last for five weeks or more, he can claim Mortgage ‘Interest Run-on’. This means that the benefit will be paid for a further four weeks rather than stopping immediately.

The Regulations represent an attempt by the government to reduce the public spending budget on Income Support. The measures were heavily criticised by many mortgage lenders as ones which would cause considerable hardship, particularly to borrowers who run into financial difficulties very quickly after becoming unemployed.

There is a range of bodies that provide advice to those who run into difficulties with their mortgages. Most major towns and cities have a Citizens Advice Bureau, which can provide guidance to those who do not know where to turn when they experience difficulties in paying their mortgage. The advice given is free and bureau advisors will usually be able to spell out the various options available. It is quite common for the borrower to be advised to contact the lender as early as possible in order that the problems do not become worse. In addition to providing guidance on short, medium and long-term arrears problems, the Citizens Advice Bureau also produces information packs on insolvency and bankruptcy.

In addition to Citizens Advice Bureaux borrowers can also contact the following organisations.

• Money Advice Centres – many local authorities provide free debt and benefit advice through money advice centres.
• The Consumer Credit Counselling Service – a registered charity whose purpose is to assist people who are in financial difficulty by providing free, independent and realistic advice from trained advisers. The CCCS offers advice through its free telephone advice line and eight centres in the UK.
• Financial advisers – although not free, the services of a good financial adviser can be of great assistance in sorting out debt problems.

There are several other sources of assistance to borrowers in difficulty. Quite often, the local office of the Department of Social Security should be the first port of call. Sometimes borrowers are not aware of the benefits they can claim, or with whom they should consult. A typical example might be eligibility for the Working Families Tax Credit. Some local housing associations are also involved in schemes to assist those in financial difficulties. Several have introduced innovative packages of measures, including schemes offered as mortgage rescue packages.

During the early 1990s, lenders came up with innovative and successful schemes. The following schemes are not mortgage products in themselves, but are schemes designed to try to assist customers in need.

One such method was based on the Business Expansion Scheme (BES).

Several lenders set up mortgage rescue schemes whereby properties belonging to those in financial difficulties would be purchased via a BES company and let to the owner-occupier. The BES approach was pioneered by the Nationwide Building Society.

A different scheme was introduced by the Bradford and Bingley Building Society enabling people to stay in their own homes on a tenancy basis and pay rent if eligible for benefit.

Some lenders have adopted a partnership approach with housing associations. One such scheme involves the housing association purchasing a whole or part interest in the property of the owner-occupier, with the latter becoming either part tenant, part owner or purely a tenant.

All of these schemes are designed to enable a family to remain in a dwelling they would otherwise lose. Before considering a borrower’s eligibility for inclusion in a rescue scheme, however, the lender has to be certain that the owner-occupier is absolutely determined to tackle the difficulties before them and avoid future problems.

The Scottish Executive introduced the Mortgage to Rent scheme in 2003. It protects homeowners by allowing them to switch tenure from ownership to Scottish secure tenancy. The scheme is managed by Communities Scotland. Owner occupiers in mortgage difficulties can arrange for a social landlord – housing association or local authority, etc – to buy the home and continue to live there as a tenant.

Mortgages can provide viable options for those who have mounting debt problems. Consolidating debts into a mortgage has advantages, particularly as mortgage interest rates are generally well below those for other types of borrowing.

For example, Richard and Tina have a mortgage of £80,000 on their house worth £150,000; the mortgage interest rate is 6.5% and the mortgage has 15 years to run. They have debts of £10,000 on credit cards, with an interest rate of 16.9%. The credit cards are costing them £140 a month in interest (this will reduce each month as some of the capital is repaid) and they have to pay at least £200 a month (2% of the balance); this is affecting their cash flow.

If they added the credit card debt to their mortgage by taking a further advance or remortgage, they would pay £54 a month on an interest only basis, or £89 on a repayment basis for the additional borrowing. This would save them a significant amount each month and ease their cash flow problem.

This does seem a very attractive proposition, but there are a number of points to consider.

Legal remedies are those actions laid down by law that a lender can take against a borrower in default. There are separate legal codes in England and Wales on the one hand and in Scotland on the other.

Look back at the definition of a mortgage earlier in the text. The nature of a mortgage is that of a secured arrangement which gives the lender the right to realise the security to recover its debt if the borrower defaults.

In England and Wales, legal remedies are laid down by the Law of Property Act 1925. There are five legal remedies, of which only four are used in practice today:

The first two of these remedies are the most commonly used. Here the lender sues the borrower for possession of the property and then sells the property in order to recover the debt.

In order to take possession, it is necessary to petition the county court for a possession order. Before the county court will even consider granting a possession order it has to be satisfied that every avenue available has been explored by lender and borrower and that possession is a very last resort. The county court can take one of three courses of action:

The lender has to be well prepared for the court hearing. It was once possible for an official of the lending institution to swear a single page affidavit setting out the position on the account. It is now necessary to make available to the court full and itemised details of transactions, including credits, debits and transfers. In addition, the lender must be seen to have done everything possible to help the borrower bring the account to order.

Once a possession order has been granted, the lender can proceed to take possession. The court decides a date on which this order is enforceable. In the majority of cases, the borrower vacates the property prior to the date of possession. If necessary, however, a bailiff of the court can enforce the possession order, usually accompanied by a representative of the lending institution. It is important to note that even after the date of possession, the lender still owes a duty of care to the borrower, and the borrower can, in fact, still return to the lender to settle the mortgage account right up until disposal of the property.

The right of the lender to sue the borrower on his personal covenant to repay the debt arises from the contractual obligations in the legal charge. This is often futile as the borrower may not have any financial resources.

In the event of mortgage loss, the lender may take further action for recovery if it believes the borrower does have the financial means to make good the loss.

The right to appoint a receiver is exercised when there is an income pertaining to the property. This happens, for example, when the property has tenants who are paying a rent. The receiver acts on behalf of the lending institution to collect rents and any other income applicable to the property, and these moneys are applied to the mortgage account to reduce the overall debt. A receiver in this context should not be confused with the Official Receiver who has a different function. A receiver acting on behalf of a mortgagee could be an employee or agent of the lender, but serves as agent for the borrower in respect of disbursement of money received and his duties of accountability to the borrower. If there is an unauthorised tenancy at the property, the lender must do nothing that could be considered as formally recognising that tenancy. A receiver, on the other hand, could be appointed when the statutory power of sale becomes exercisable and will then be able to collect the rent and pay it to the lender while the lender could still formally deny approval of the tenancy.

The receiver is the agent of the borrower but must apply any income derived from the property to the mortgage account.

The remedy of foreclosure is of historic importance only. Despite the word being used generically to mean pursuing recovery of a debt, a foreclosure order is never used in the UK today. When a lender forecloses, they take over ownership of the property and can keep all of the sale proceeds. Today this would be considered to be unfair to the borrower.

A foreclosure order would result in the borrower forfeiting the equity of redemption – all rights to the property would be extinguished. The lender would theoretically be able to take possession, sell the security and retain any surplus. The borrower would lose the right to redeem the mortgage once it had been taken into possession. Today this would be regarded as inequitable. In any event, the foreclosure procedure is extremely cumbersome. The petition has to be made to the Chancery Division of the High Court of Justice, and in the case of joint borrowers, separate foreclosure orders have to be sought.

Under Scots law, the remedies available to a lender to which a borrower has granted security fall under the following headings:

• calling up;

• notice of default;

• sale;

• entering into possession;

• repair and alteration;

• poinding of the ground;

• adjudication;

• foreclosure.

These remedies are available under the Conveyancing and Feudal Reform (Scotland) Act 1970. Of these, it is only necessary to consider the first four remedies.

The solicitor will serve on the borrower EITHER:

• a calling up notice – this requires the whole debt to be repaid;

OR

• a notice of default – this requires only the arrears to be brought up to date, or another breach of the mortgage conditions to be remedied (eg a failure to repair the property).

Alternatively, if the borrower is insolvent, the lender may obtain a court warrant to sell the property.

Failure by a borrower to comply with a calling up notice or a notice of default enables the lending institution to proceed to possession and ultimate sale. If the borrower does not leave the property of his or her own accord, the lender has to take court action to seek ejection of the debtor. The principles of possession and sale are similar to those applicable to England and Wales. (The reference to ‘Purchase is settled’ in Figure 2 following 2.2.3 is to signature of the Disposition and payment of the purchase price.)

The Mortgage Rights (Sc) Act 2001, which came into force on 3 December 2001, is also relevant. It provides increased protection to debtors and their families from lenders exercising remedies on default. The Act gives the debtor (and certain other parties including a cohabitee of either sex) the right to apply to the court for suspension of enforcement proceedings. An order may be granted where it is considered reasonable in all the circumstances having particular regard to the nature of and reasons for the default, the applicant’s ability to remedy the default within a reasonable period, any action taken by the creditor to assist the debtor remedy the default and the ability of the applicant and those residing with him or her to secure reasonable alternative accommodation.

The Act also provides for a notice (see Figure 1) to be issued to an occupier of the property. This allos a tenant the opportunity to give reasons for suspension of enforcement proceedings.

Possession procedures are described in Figure 1.

Eviction of borrowers often receives high profile media coverage. In the majority of cases, the property is vacated voluntarily – eviction is comparatively rare and a last resort. Many borrowers simply hand over the keys to the lender.

Once vacant possession has been obtained, it is important to ensure that the borrower cannot regain entry to the property. Arrangements, therefore, have to be made immediately with a locksmith to change the locks of the property and secure all points of entry. Other matters that have to be considered are as follows:

A mortgagee in possession could be held to have been negligent if it can be established that a duty of care is owed to a borrower in respect of personal belongings he had left behind in the property.

The procedure for the sale of a property by a mortgagee in possession (heritable creditor in Scotland) can be seen in simplified form in Figure 2.

Once a property has been taken into possession, the lender will seek to dispose of it as quickly as is practicable in order to recoup the funds advanced. Valuation will be necessary in order to determine an appropriate selling price. Some lenders use property disposal agencies who specialise in bringing properties to market which are in the hands of mortgagees in possession. Other lenders rely on their own internal resources.

In dealing with properties in possession, lenders have obligations to their former borrower. In the eyes of the law, the borrower retains what is called an equity of redemption. This is a right to settle the mortgage debt at any time. In addition, the lender has a duty of care to obtain the best price reasonably obtainable, though it does not necessarily have to look after and maintain the security indefinitely to obtain a higher price. In order to establish that this obligation has been fulfilled totally, many lenders will, having obtained an acceptable offer for the property, place an advertisement in a newspaper seeking last and final offers by a particular date (England and Wales).

When in possession a lender still needs to ensure that it is acting reasonably and not to prejudice the borrower’s rights. For example, fixtures (ie items that are permanently fixed to the property) pass to the mortgagee, fittings (items like furniture that are not fixed) are retained by the mortgagor. The mortgagor should have removed all fittings before leaving the property but if this hasn’t been done it would be wise for the lender to produce a list of any such fittings and to document how the items have been dealt with. For example, it could allow the borrower back into the property to remove them, or it could arrange for them to be removed and placed in storage. However, the lender needs to be careful as it could be liable if it acts negligently.

In Scotland the debtor may redeem the mortgage at any time up to conclusion of missives of sale. In respect of disposal of the mortgaged property, the Conveyancing and Feudal Reform (Scotland) Act of 1970 imposes a duty on the lender to advertise and to meet a specified minimum standard of advertising.

Some lenders consider auction as well as private treaty to ensure that the highest price possible is obtained for the property. If a lender sells a property and fails to obtain an appropriate selling price due to error or omission from the sale particulars, it can be sued for damages by the former borrower. In a case that occurred in 1971, one lender had to pay in excess of £10,000 damages to the former borrower because the sale particulars omitted any reference to planning permission that existed on the property that would have substantially increased the potential selling price.

Recent court cases have emphasised the need for lenders to take great care in this area. In one recent case, a county court judged that a higher potential purchase price could be obtained by allowing the borrowers to remain in the property, provided that there was a serious effort to bring the property to market and eventual sale. In another case, a borrower was able to establish in court that the lender was taking too long bringing the property to market and that the mortgage debt was accumulating faster than necessary.

It is a fact that properties held by mortgagees in possession do not attract the same prices as those sold by their owners. When borrowers run into financial difficulties they are likely to neglect essential maintenance, which would maintain the value of the property. In addition, the ‘grapevine’ may operate in the immediate area. This may also have an adverse effect on the value of the property.

For this reason, several courts in recent times have taken decisions to allow borrowers in default to stay in the property, on condition that serious efforts were made to bring about a sale.

Conversely, in another court decision, the borrowers were successful in forcing a lending institution to bring the property to market more quickly than they wished. The court accepted that, while the condition of the property market was not ideal, it was unreasonable for the lender to delay a sale when the mortgage debt was increasing daily.

The increase in the number of possessions during the 1990s has made it necessary for lenders to collaborate in order to ensure that information on a borrower’s debt history can be shared. Lenders experience a fairly high level of fraud – in a survey by the Police Federation in the early 1990s, it was found that one in twenty mortgages had been subject to some kind of fraud. The nature of fraud varies from simple over-statement of income to highly organised attempts to obtain thousands of pounds from financial institutions.

The CML Possessions Register is a database holding information on those borrowers who have had their properties repossessed by CML members. A CML member can consult this database when considering any mortgage application in the same way that orthodox credit searches are carried out. The CML Possessions Register is fully computerised and maintained by the secretariat of that organisation at its London headquarters.

As we saw earlier, the higher lending charge is the most common form of additional security accepted for a residential mortgage. To recap, it is a single premium general insurance policy written in order to protect the lender’s interest on higher percentage loans. The borrower pays the fee for this policy but the policy protects the lender.

Higher lending charges were a fairly low risk type of business for insurance companies until the property slump of the early 1990s. After this, however, the number of claims started to accelerate. Moreover, a higher incidence of mortgage loss occurred due to the value of properties falling substantially in certain areas of the United Kingdom. Consequently, many lenders found that they were making losses on mortgages even where mortgage indemnity guarantees existed.

In the event of mortgage loss the lender can sue the borrower for the outstanding debt under the personal covenant made in the mortgage deed. In turn the insurance company that has underwritten a mortgage indemnity guarantee can sue the former borrower for the amount that has been paid to the lender under its right of subrogation. This practice was the subject of considerable debate during 1995 and 1996, culminating in a case involving a Mr Browne and the Woolwich Building Society. Mr Browne contended that he should not be liable to pay back the amount paid to the Woolwich Building Society. His claim was rejected by the court.

It is reasonable that a borrower should be expected to meet the costs of the MIG insurance company. The mortgage deed commits the borrower to meet all payments due under contract. It is rather fanciful to expect to be able to insure away this obligation with a one-off insurance premium.

That said, there is a role for mortgage advisers in educating borrowers to understand this principle. While some borrowers may bring legal action of the type taken by Mr Browne on a matter of principle, some may well have been advised wrongly in the past on what the MIG actually does.

It must be accepted that it is easier for those within the financial sector to understand the mechanics of products such as mortgage indemnity guarantees than it is for the layman.

Section 3

Other post completion matters

The interest rate and charges made in connection with a mortgage can only be changed in accordance with the terms set out in the contract. Over the life of a mortgage, the conditions imposed by the lender on new borrowers are likely to change several times. For each contract, however, it is the terms and conditions which are in force at the time of completion that bind both lender and borrower.

Older borrowers will remember times when interest rates on mortgages were virtually constant, even though they were permitted to be varied under the mortgage deed. It is now common to expect several rate changes each year. To variable rate borrowers, these changes can have a significant effect on the household budget.

In some instances, the lender may be prepared to relax some of the conditions of mortgage, resulting in an advantage to the borrower. For example, one lender has a clause in its older mortgages that six months’ interest may be charged on early redemption. When this attracted widespread adverse publicity, the lender introduced a concession whereby only three months’ interest would be charged. The condition in the mortgage stayed the same, but the lender was, in this instance, prepared to forego some of the income that could legally be derived from it.

Older mortgages may also have a minimum period of notice specified before repayments can be adjusted following an interest rate change. Such a period might be three or even six months. This creates a disadvantage for the lender – when interest rates are rising investors expect the immediate benefit of these, but the cost of paying increased interest to investors cannot be passed on to these borrowers immediately. The condition cannot be changed retrospectively, so the lender has to wait for these mortgages to be paid off until new conditions can be imposed across the board.

Building societies are mutual institutions whose constitution comprises a memorandum and a set of rules. Historically, many societies had a rule that stated that interest rate changes would be notified to borrowers by post – a time-consuming and costly exercise. Again, this is a factor which can reduce competitiveness when interest rates change frequently, so most societies with this rule have changed it by consent of the members via a special resolution passed at a general meeting.

As most mortgages in the UK are offered on a variable rate basis, at least for the major part of the term, interest rate changes inevitably affect virtually every borrower at some time. The lender must therefore have a system in place whereby changes in repayment can be formally notified. Most lenders have information systems that bring a high degree of automation to this process. At each rate change, the lender should also be geared up for the increased number of telephone calls and letters from borrowers generated by the change.

Most mortgage interest rate changes come into effect immediately and are communicated to borrowers by way of press advertisements. Advisers might receive a higher volume of enquiries about mortgage accounts at such times.

All lenders have a tariff of charges imposed on borrowers as well as an interest rate structure, which sets out the price of each lending product in the portfolio. Examples of these charges are:

Mortgage legislation commits lenders to notifying these charges in advance of borrowers incurring them and making sufficient information available to the borrower before he signs up for a product so that an informed purchasing decision can be taken. Changes to tariffs of charges must be notified on an annual basis.

Lenders will, therefore, make a special point of publishing a scale of charges for all to see, removing any ambiguity wherever possible. Nevertheless, banks and building societies have had to deal with many complaints from borrowers in respect of charges. Some of these complaints have been referred to the appropriate ombudsman for further consideration.

Those on annual review schemes can be particularly hard hit in a period when interest rates increase several times.

It is especially important that a borrower is kept fully aware of any procedure that may increase his debt in the future. An example of this would be where a borrower’s monthly payment is adjusted annually under an ‘annual review scheme’.

At the beginning of a 12-month period the monthly payment is set at the current interest rate. Any rate changes during the ensuing 12 months will affect the amount of interest charged to the account and a new monthly payment will then be calculated at the end of the period. If the interest rate has increased several times, then the borrower may be faced with a substantial increase in his monthly payments. The good mortgage adviser will explain in detail, at the application stage, how such a scheme operates if the applicant is considering taking it up.

Where discretion is used by lenders, this must be applied fairly rather than in an arbitrary fashion. For example, some lenders waive redemption fees under certain circumstances. A situation must be avoided whereby the lender is seen to act differently towards one borrower than another – a clear case for having a consistent policy.

As well as changes in interest rates and the tariff of charges made in connection with mortgages, other conditions of a mortgage may be varied. These include:

• transfers of equity – where a borrower is added to or removed from the mortgage deed;

• permission to let the property for a specified period;

• extension of the mortgage term;

• change from capital and interest method of repayment to interest-only;

• change from interest-only method of repayment to capital and interest;

• release of part security.

These are all events that affect the contractual relationship between lender and borrower and some are considered in the sections that follow. If formal changes to the contract are to be made, a deed of variation may be required. Other changes can be made without the consent of the borrower, such as changing the interest rate from time to time. But as a general rule, it must be emphasised that contracts ordinarily cannot be altered without the agreement of both parties.

The mortgage contract cannot be varied from the terms and conditions applicable on the completion date without the sanction of both parties.

In most cases where a variation of mortgage conditions is permitted, it is necessary to complete legal formalities to bring about the change in a proper manner. Lenders may also make administrative charges for changes – these charges have to be consistent with the lender’s published tariffs.

A transfer of equity arises when:

In either event, the lender has the final say on whether this course of action is acceptable or not. The legal charge, or standard security, is made between the parties specified in the original contract – the contract can only be varied by agreement of those parties.

A transfer of equity request is often made at the same time as a request for a further advance (eg the remaining borrower needing to raise finance to ‘buy-out’ the borrower that is leaving the property).

A transfer of equity is usually requested if there is a change in domestic circumstances. Be aware, however, that some borrowers may make such a request in order to attempt to escape from obligations to creditors.

It is normally the borrower who originates the request. Why are transfers of equity required?

The most common reason for a borrower to request to be released from the mortgage is where joint borrowers split up through divorce or separation. As about one in three marriages in the UK end in divorce, this can be a common feature of mortgage administration.

A less common reason for a request to release a borrower from the mortgage contract is where that party is seeking to escape creditors. It is a common fallacy that a person faced with bankruptcy can protect assets by transferring them to a partner or spouse. In practice, the Trustee in Bankruptcy can seize those assets anyway!

Similarly, a person may wish to be added to the mortgage when a relationship is formed and that person moves in with the existing borrower. This makes little difference to the occupant’s rights if the two people legally marry – under the Family Law Act 1996, an occupying spouse has rights whether named on the mortgage deed or not.

The lender must consider many factors when a request for a transfer of equity is made, and these include the following.

As mentioned above, the purpose may be straightforward or concealed. The lender has to get behind the request in order to understand the borrower’s motives for the approach.

From a positive point of view, a request to transfer equity can result in additional business from unfortunate circumstances. Often when two people split up, additional mortgage finance is required, firstly, by one person to ‘buy out’ the other and, secondly, for the person leaving to buy a new home. There are also other related product needs which a revised factfind for both parties would reveal.

If a person is to be removed from the mortgage, the remaining person’s financial circumstances have to be examined in order to discover whether his income and outgoings are compatible with the mortgage outstanding. This may involve taking references and/or examining statements, as well as carrying out a credit search for details of any other bad debts.

If the transfer request is due to separation or divorce, the lender must be mindful that the borrower remaining might have maintenance payments – these may or may not be finalised at the time of application, but they can substantially affect ability to repay the loan.

Impairment of the status of the borrower may also take the loan outside the criteria acceptable for MIG cover.

Evidence of impairment of the loan (that is, where the ability to service the loan has deteriorated) may necessitate making a provision for potential loss, whether or not a transfer of equity is sanctioned.

If a person is moving in, it must be established whether it is intended that he wishes to be party to the mortgage contract. If so, normal status enquiries should be made before the legal procedure is carried out.

If the new occupier is already living in the property at the time of transfer, and the lender is aware of this, it is necessary to have the non-owning occupier complete a ‘consent to mortgage’ form, waiving rights of residence should the lender have to pursue vacant possession. Failure to do this can result in the occupier enjoying a right of residence that overrides the mortgage under section 70 of the Land Registration Act 1925 (England and Wales only). In effect, the lender would not be able to obtain vacant possession following litigation for possession unless the consent has been obtained.

The track record to date is important, but the lender needs also to ascertain which of the parties has been paying the mortgage up to this point. If it is the person seeking to be released, the individual who is to remain in the property must be made aware of the serious obligation that the mortgage entails – the borrower may have no idea what he is taking on board. Indeed, it is very important generally that the person remaining is fully aware of the consequences of releasing the other party to the mortgage.

Obviously, less can be learned from looking at the track record if the loan is relatively new. If, on the other hand, the borrowers have a long-standing relationship with the institution, it may be possible to learn quite a lot from examining the past conduct of the account, as well as (sometimes) the adviser’s knowledge of the individuals concerned.

If the loan is supported by a guarantee, any proposed changes in the terms and conditions of the guaranteed mortgage must be sanctioned by the guarantor(s).

If the mortgage is an interest-only one, there may be a life assurance policy in existence, the proceeds of which were originally intended to repay the loan on maturity of the mortgage. Quite often these policies are in joint names.

If the policy is assigned to the lender as security, then the lender must be involved in any variation of the policy terms.

The borrower’s ability to repay has to be considered alongside the current loan-to-value ratio. Only by looking at these two factors will the lender better identify the risk. A revaluation of the property may be necessary.

The lender will charge a fee for the transfer of equity, which will be borne by the borrower.

The method of transfer will be by deed (deed of variation in Scotland). It is normal to take legal advice and arrange for a solicitor to act.

A transfer of equity is both an OPPORTUNITY and a RISK. The opportunity for a review of needs and possible new, or additional, needs for each party. The risk, the release of a borrower, who could otherwise be looked to for payments and so on.

It is the right of any borrower to redeem any loan at any time. The law does not permit lenders to obstruct this right, although they are at liberty to make a reasonable charge to cover their lost income.

The borrower could take the opportunity to make early redemption (provided there was a sufficiency of funds) if for example:

When early redemption is sought, this may not always be the best course of action for the borrower. The borrower should be encouraged to take an overall view of his financial circumstances to decide whether there are more efficient ways of using the funds.

On receipt of a request for early redemption, many institutions now have systems designed to try to capture further lending business. A major reason for loss of mortgage business is that borrowers see a ‘better deal’ elsewhere and go for this without consulting their existing lender. It is likely, therefore, that the lender will write to the borrower to promote further borrowing, provided of course the borrower has been a regular payer.

For early redemption to be made, a date of redemption is required – the information systems of the lender will provide details of what amount is necessary to pay off the loan, as well as daily interest to be debited should the redemption be delayed.

Many lenders charge early redemption interest to offset loss of anticipated interest from the loan. This would have been expressed in the mortgage deed or conditions at the time the mortgage was completed, and is readily available information on request. These fees are usually expressed in terms of so many months interest or a flat charge. This fee can amount to a significant sum and must be taken into consideration in the overall calculation.

In extremely rare circumstances, a court can decide that a redemption penalty is a ‘clog on the equity of redemption’. This means that the court feels that a condition has been imposed deliberately to prevent a borrower from paying back the loan. In such cases, the court can set aside the clause in the mortgage thus allowing (early) redemption.

Once a borrower has made all payments in accordance with the conditions of the legal charge, the loan is redeemed. If the lender is satisfied that all charges to the account – interest, capital, fees, costs, charges and so on – have been paid in full, the borrower can be released from the mortgage. The lender’s action in doing so is called ‘vacation’ of the mortgage (or ‘discharge’ in Scotland).

In order to vacate or discharge the mortgage, an officer of the lending institution signs a receipt to this effect. This is either a form specially used for the purpose, or a part of the legal charge or standard security document itself. A solicitor then completes the legal work. When completed, the borrower is released from the mortgage to the lender. A release fee is sometimes charged.

As an added service, some lenders hold a small amount (usually £1) as a debit balance on the mortgage account so that the mortgage is still in force. Basically, this provides a free safe custody facility for the borrower in respect of the title deeds.

Sometimes a borrower may wish to pay a lump sum to reduce the mortgage balance. This is called a part redemption.

When a part redemption is made, subject to the agreement of the lender, the borrower can either:

The most common reason for making lump sum repayments is because the borrower wishes to pay off the mortgage earlier than the agreed redemption date.

Most lenders set down a minimum amount that will be accepted by way of capital reduction. This can be as little as £500. This stipulation is mainly in place to enable the transaction to be completed as a capital reduction rather than an earlier than scheduled monthly repayment. As more lenders move towards daily interest systems of calculating interest, the need to differentiate between capital reductions and other payments becomes less important.

It is important for the borrower to make sure he knows the lender’s attitude towards part repayment. Some lenders will not apply the money to the account until the end of the year, which means it will have no effect until then. Many lenders will accept part repayment but need to be told to use it immediately to reduce the capital – otherwise it will sit in an account until the year end. Where the part repayment represents part of a ‘special deal’ mortgage – fixed rate, discount and so on – a proportional penalty may apply.

It is possible for a mortgage term to be reduced or extended.

To reduce the mortgage term, the borrower can make larger monthly repayments than those in the mortgage contract. This reduces the total amount of interest payable on the mortgage. Some borrowers leave their monthly repayments unchanged when interest rates are falling, based on the idea that they have been able to make the payments up to now and can continue to do so. This reduces the mortgage term.

The term of the mortgage can also be extended. This is sometimes an option for borrowers who have run into financial difficulties. It has the effect of reducing the monthly repayment and hence making the mortgage more affordable.

Lenders will only agree to extend the term if it is felt that it represents a genuine solution to the problems of the borrower. If the lender feels that the ability to repay the loan will not be helped, an extension of the term will not be allowed.

No money will be saved directly by extending the term of an interest-only mortgage The only time this may be of benefit would be to give the associated investment vehicle more time to grow.

Borrowers are often tempted to convert their existing mortgage deal to another. This can often result in a lower rate of interest or a more attractive arrangement. In this situation, most of the process relating to buying a house will apply. This means that the costs of moving the mortgage will be similar to those of buying the house. Charges will include:

Given the highly competitive mortgage market, many lenders offer packages that pay for some or all of these costs – either through a specific arrangement or through a cash-back incentive. If such a package is accepted, however, there may be penalties for redemption in a specified term. The borrower should take all of these potential costs into account when deciding if the proposed deal is actually as good as it looks.

A second mortgage is one secured on the same property by a lender other than the first mortgagee. Second mortgages are offered by some banks and virtually all finance houses. By contrast, building societies tend not to offer these unless they already hold the first charge.

If another lender is approached for additional finance, a questionnaire will be received by the existing lender making enquiries about the conduct of the account and details of the mortgage. In applying for the second mortgage, the applicant will have given consent for this information to be released. A lender is not obliged to supply information to the second lender. A fee is normally charged for supplying the information.

If the second mortgage is granted, the second lender will notify the first mortgagee and will create a charge on the property.

Sometimes, if the conduct of the loan deteriorates significantly, first and second mortgagees will co-operate on litigation for recovery.

The existence of a second charge can be an early warning sign of problems, especially if the borrower has already been turned down for a further advance by the first lender. In particular, finance houses tend to charge higher rates of interest, commensurate with higher risk, indicating that the borrower may be more than anxious to secure a lump sum urgently. Alternatively, the borrower may be capable of taking on the extra debt without risk of inability to service both loans.

If a mortgage is in default, the lender will eventually proceed to possession and exercise its power of sale to recover the debt. The holder of the first charge (the original lender) takes what is legally due to it from the proceeds then passes the balance of the sale money (if any) to the second mortgagee (the second lender), who takes what is due to it. When all lenders have been satisfied, the balance, if any, is passed to the borrower.

There can, of course, be third, fourth and even subsequent mortgagees, all with loans secured on the same property.

The 1980s saw many institutions move into the UK mortgage market, attracted by high growth and lucrative margins. The process reversed as the market stagnated in the 1990s. Many institutions that had entered the market moved out, selling their mortgage books to other lenders. This entails a transfer of mortgage.

Either the mortgage deed will have a clause allowing the lender to transfer the mortgage to another, or the lender will seek the consent of the borrower. Whichever way permission is given, it will normally be subject to conditions, including a condition that the borrower will not thereby be prejudiced.

Transfers of mortgage are subject to a Statement of Practice to which most lenders subscribe. In essence, this states that a lender will not transfer a residential mortgage to a body outside of the company group without the borrower’s consent. The lender must provide the borrower with sufficient information to enable the borrower to make an informed decision.

There is little effect on the borrower if the mortgage is transferred, as the original conditions of the contract remain in force.

A lender must not rely solely on any consent to the transfer of mortgage that is contained in legal documents, unless it drew this to the borrower’s attention before the mortgage was completed.

A lender may seek the borrower’s general consent, but notwithstanding any general consent that the borrower may have given, the lender will seek the borrower’s specific consent on any transfer under which the lender would cease to:

• exercise discretion in the setting of the mortgage interest rate; or

• determine the conduct of relationships with borrowers whose mortgage payments are seriously in arrears.

Many lenders adjust their mortgage books by transfers to and from other lenders. Some do so through subsidiaries that specialise in this field. The pioneers in this field were the ‘centralised lenders’ that were set up (mainly) in the 1980s.

Does your company transfer mortgages? If so, how does it obtain the sanction of the borrower?

All lenders specifically exclude the right in the legal charge to let the mortgaged property. Anyone who lets a property without permission from the lender is, therefore, in breach of the mortgage and is in default.

Tenants can represent a serious risk to the lender. There are many cases where the condition of properties has deteriorated significantly as a result of the actions of tenants. The most important reason for caution, is that a tenancy can, under certain circumstances, become binding on the lender as well as the borrower. When a property has to be sold with a ‘sitting tenant’, its value will be a fraction of the market value with vacant possession.

Lettings requests are not always rejected out of hand. On the other hand, it can be beneficial to have a tenant living in a mortgaged property. For example:

Any requests to establish a tenancy must be referred immediately to the lender. Each lender will have a policy relating to lettings and these must be followed strictly in order to avoid later problems.

Whenever dealing with persons who have suffered a recent bereavement, it is essential that mortgage advisers adopt a patient and sympathetic approach. It is one of the most difficult situations to handle. Often, the customer will require guidance on not only the mortgage, but all financial relationships with the organisation. Some bureaucracy is inevitable, but it is the duty of the adviser to make this as trouble-free as possible.

On notification of death, the adviser should request that a death certificate be provided so that the institution can formally amend its records. Most institutions require an original copy issued by the Registrar or a copy certified by a solicitor.

The institution should check its records of all dealings with the deceased person. For example, he may have had savings and investments as well as the mortgage account. If the lender has a relational database through which multiple customer relationships can be tracked, this makes the task much easier.

In most instances the computer system will have a facility for noting that the borrower has died. It is essential to amend the records immediately:

If the mortgage is held in joint names, the debt becomes the responsibility of the surviving party. The records can be amended and the mortgage account can continue in the sole name of the survivor. Obviously, the institution should be prepared to give appropriate advice through the difficult period now facing the survivor. In particular, he may require guidance on what to do about life assurances or pensions and where to enquire about benefits.

If the mortgage was in a sole name, the institution must then await completion of legal formalities. In due course, it will be notified by a solicitor or the executor or administrator, depending on whether the deceased made a will or not.

If the executor or administrator subsequently wishes to sell the property, a redemption statement will be requested in due course. Once the property is sold the mortgage will be discharged and any surplus passed to any second and subsequent mortgagees (if any) and thereafter to the estate.

The position of joint borrowers and sole name borrowers can be summarised as follows.

Where one joint borrower dies, the property will automatically vest in the surviving party or parties to the mortgage. They in turn retain full obligations for the money due, as most mortgages are created on a joint tenancy (or common property) basis.

In the event of death of a joint owner, a copy of the death certificate should be obtained and stored with the title deeds. The mortgage account records are amended to show the remaining borrower(s).

If there is a life assurance policy in place, this should cover most, if not all, of the debt, enabling the mortgage to be redeemed if desired.

On the death of the sole borrower the property is vested in the personal representatives of the estate. They have the responsibility to continue with obligations under the legal charge or standard security until grant of probate or letters of administration are issued, (or confirmation in Scotland) following which the property may be sold if desired.

Generally, the outcome to the lender will be redemption of the mortgage by the successors of the deceased selling the property or, alternatively, from the proceeds of a life assurance policy.

In rare cases, a lender has to take action against the estate of the deceased if payments cease for a protracted period and nothing is done about the situation. This obviously is a last resort.

Where an individual dies without a valid will, he will have died ‘intestate’ and his estate will be distributed in accordance with the laws of intestacy. In relation to property, this will apply where the property is held in the owner’s sole name, or to the appropriate share on the death of a tenant in common; property held in joint tenancy will be dealt with as explained earlier.

Surviving spouse, no issue or other family – surviving spouse gets the whole estate.

Surviving spouse with issue (children/grandchildren) – spouse gets £125,000, personal chattels and a life interest in 50% of the balance; issue get 50% of the balance.

Surviving spouse and surviving parents, siblings (or their issue) – spouse gets personal chattels, £200,000 plus 50% of the balance; family get the other 50% of the balance.

This is particularly relevant where the property is a significant part of the estate. In cases of intestacy the property may have to be sold to pay off other relatives. It is possible to apply for a postponement to allow the surviving spouse to continue living in the property, but this will only be granted where the property is appropriate for the needs of the survivor; a large family house may not be.

However, legal rights rank behind the rights of the surviving spouse known as ‘Prior Rights’, which comprise the following:

There is no representation in Prior Rights (eg a pre-deceasing spouse’s right does not transmit to a surviving child).

The same Legal Rights as already mentioned may then be claimed (and settled only if estate is available) from moveable property. The remainder is termed the ‘Free Estate’ and is distributed according to the following statutory order of succession:

Each class must be exhausted before claims from onwards classes may be considered.

When a borrower moves home, the existing mortgage must be redeemed and a new one taken out. It is not possible to transfer one mortgage charge to another property. This means that the costs associated with buying a home will be incurred again.

The charges will vary from lender to lender and from property to property. Many lenders provide a portability option, whereby any penalties for redeeming the original mortgage are waived if a new mortgage is taken out with the same lender. In some cases any existing special deal can (or must) be taken to the new property for the balance of the initial term. For example, if a £50,000 mortgage fixed for five years was in place on the original property, the first £50,000 of the new mortgage could be taken on the new property for the balance of the fixed period. The balance of the new mortgage will be based on offers available at the time. In some cases the lender will insist on such an arrangement.

Bridging finance may be required when a borrower moves house and the date of disposal of the existing property falls after the date of acquisition of the new one.

There are two types of bridging finance:

Open bridging finance can be a disaster – a bottomless pit into which the borrower effectively makes repayments on two mortgages. Borrowers should be advised to think long and hard about the consequences.

Bridging finance is offered by all banks and some of the very largest building societies. For obvious reasons, lenders are much more prepared to lend in closed bridging situations than open bridging ones.

The practice of many developers in taking properties in part exchange has reduced the need for bridging finance to some extent.

These plans are designed to enable elderly homeowners who do not have a mortgage on their property to release some of the equity in order to supplement their retirement income. They are regulated by the Financial Services Authority.

The loan is obtained by mortgaging the property to the plan provider and is limited to a certain percentage of the current market value of the property. This limit varies from lender to lender but is usually between 40% and 65% and depends on the age of the applicant. The minimum age is usually between 60 and 70.

Originally, the funds had to be used either to buy a purchased life annuity for the remaining lifetime of the applicant, or invested in a variable rate bond. The mortgage interest was paid out of the income received, with the balance being retained by the borrower. However, many plans no longer stipulate how the funds raised should be invested, thus giving the borrower freedom to use the moneys in any way he chooses.

In addition, the mortgage interest is now often allowed to ‘roll-up’ and is paid, together with the original loan, out of the proceeds of sale following the death of the borrower. In the case of joint borrowers, this will be delayed until the second death. If the interest is allowed to roll-up, then the percentage of the property value that can be borrowed may be further restricted. This type of scheme is called a ‘roll-up’ scheme to differentiate it from a conventional home income plan. The funds raised can be used for any purpose.

The advantage of a home income plan that requires the purchase of an annuity is that both the mortgage interest rate and the annuity income are fixed for as long as the borrower lives. In other words, the net addition to retirement income does not change.

The main disadvantages of home income plans now are:

People who took out the earliest home income plans did not enjoy the safeguards and protection offered by the Safe Home Income Plans (SHIP) trade association. Major problems were caused because:

The result was that many borrowers found themselves with either negative equity or insufficient income to meet the loan payments, or both. SHIP was established to ensure that such problems did not recur. All plans provided by lenders who subscribe to SHIP’s Code of Practice must include the following safeguards:

These schemes have become much more popular than home income plans as a result of falling annuity rates in recent years. They also are only available to elderly homeowners who have no mortgage on their property. A home reversion scheme involves the owner selling all or part of his property to the scheme provider in return for a lump sum. Unlike a home income plan, this type of scheme does not involve the creation of a mortgage as the ownership of the property is transferred to the scheme provider. Hence, home reversion schemes are not regulated by the Financial Services Authority. The funds raised can be used for any purpose. The minimum age at which an application can be made varies from provider to provider but is usually between 60 and 70. Schemes provided by companies that subscribe to the SHIP Code of Practice must include the same safeguards as already detailed for home income plans.

Anybody considering a home reversion scheme must be aware that if the entire property is sold, he and his heirs will not benefit from any future increase in its value. On the death of the last surviving occupant, the property is sold and all proceeds retained by the scheme provider. Where only part of the property is sold, the relevant proportion of the sale proceeds on death pass to the deceased’s estate.