What Happens If I Default On A Homeowner Loan?
What Happens If I Default On A Homeowner Loan?
Find out what happens if you fail to keep up the repayments on a home loan and how to avoid falling into arrears.
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Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in homeowner loans
A homeowner loan is repaid through regular monthly repayments. If you fail to keep up the monthly repayments, your loan could fall into default and your lender will try to recoup their lost funds.
As a last resort, your property could be at risk of repossession, much like if you failed to keep up repayments on a mortgage.
As a responsible homeowner loan broker, we always look to avoid these problems in the first place by working with our clients to adhere to responsible lending best practices.
We do this by ensuring that the homeowner loan rates and monthly payments offered are affordable and where things are tight, we aim to offer a fixed rate homeowner loan where appropriate.
In this article, we use the term homeowner loan to describe these products, but the advice is equally valid for secured loans, second charge mortgages and home equity loans.
How to manage homeowner loan arrears
When you apply for a homeowner loan, nobody plans on falling behind on the repayments, but unfortunately, it is something that must be considered. Falling into arrears on your debts is a far from ideal scenario and can cause significant stress.
While it’s an unpleasant problem to deal with, facing up to the issue is by far the best course of action.
Arrears can be worrying for a borrower and is also a problem for your lender. Ultimately, both parties want the issue to be resolved as soon as possible.
As such, tackle the problem with your lender, rather than trying to go it alone. Most lenders will be far more understanding of your problems if you communicate with them
Read more – bad credit homeowner loans or homeowner loans for self-employed borrowers.
If you’ve missed one payment
If you’ve missed one payment, take the following steps:
- If possible, contact your lender and make payment.
- If this isn’t possible, create a budget plan to gain a detailed understanding of your finances. You’re going to need to contact your lender (and they will try to contact you), so understanding what you can afford going forward is crucial.
- Now contact your lender, let them know what has happened and ask if there is anything they can do to help. Some lenders may be willing to vary the terms of your loan, offering you a payment plan, payment holiday or even breathing space.
- At this point, your lender will most likely ask for a budget plan to understand your finances, including your income and outgoings. You’ll have already completed this, so will be able to complete their forms quickly.
- Try to agree on a realistic plan with the lender to catch up your missed payment.
If you’ve missed several repayments
- Again, try to catch up your arrears as soon as possible. While this may not be simple, it is by far the best course of action if you can do so.
- Communicate regularly with your lender and proactively let them know what your situation is. They must treat you fairly and look to work with you, where realistic. In some cases, you may be able to negotiate a payment break, switch to interest only, reduce your monthly repayments or even hold off on further action. This is at the lender’s discretion, so communicating clearly will help to create a positive relationship that could help.
- Consider contacting a debt organisation like Citizen’s Advice or StepChange. They can give you free debt advice or deal with your creditors on your behalf.
Read more – homeowner loans in England or homeowner loans in Scotland.
What does a lender do if payments are missed?
As homeowner loans are regulated under the Consumer Credit Act of 1974, your lender is required to follow a certain process when trying to recover loan arrears. The steps are:
Issue a notice of arrears
The first step is a notice of arrears, which is issued by your lender.
This is a standard letter that is issued to let you know how much you owe and where you can get free debt advice.
Issue a default notice
According to the Consumer Credit Act 1974, if you have missed three to six contractual payments on your credit agreement, your lender should send you a default notice.
A default notice is a warning that your account is about to fall into default.
From here, you normally have around 2 weeks to catch up your arrears before the account officially goes into default.
A default marker is added to your credit record
If your loan repayments aren’t caught up after the issuing of a default notice, a default marker is added to your credit record.
Defaults stay on your credit record for 6 years and can make it more expensive, or even more difficult to get credit during this time.
Defaults have severe consequences for your loan too, as upon the issuing of a default notice, the full balance becomes payable. The account may also be passed to a debt collection agency.
Court action is taken
Court action could result in you having to sell your property. This step is only taken if you can’t maintain your homeowner loan repayments after the account has gone into default.
Forced sale of the property (either with you selling the property, or the property being repossessed and sold) sees the lender recoup their funds from the sale proceeds.
Repossession is a long process and is only used in extreme cases of arrears and must follow a strict process.
Read more – homeowner loans for home improvements or homeowner loans for debt consolidation.
Will missed payments affect my credit history?
Yes, missed payments on a homeowner loan will negatively impact your credit history.
Any blemishes on your credit record can make it more difficult, and certainly more expensive to borrow money.
Your credit record records the last 6 years, meaning any missed payments will remain visible for this time.
This could make it more expensive should you wish to remortgage with a homeowner loan to a new lender.
How can I prevent homeowner loan arrears?
The first step is to complete a budget planner, these are a useful tool to highlight income vs spending.
Once all expenditure has been listed, categorise this into important items such as mortgages, debts and bills, crucial expenditure such as food and basic clothing, and then unimportant items such as luxury items that you could go without.
Make sure that important expenditure is paid first, and luxury items are paid for last, if at all. If after paying important items you have funds left over, it’s worth considering using this to overpay your debts.
Quite often, clients fall into the trap of overspending on luxury items, leaving a shortfall to pay important expenditure.
What can I do if I have fallen into arrears and my lender wants to repossess?
If you fall into arrears and will be unable to catch these up, the only way out may be to sell the property.
If this is the case, you could consider a bridging loan to repay the debt and catch up the arrears.
This would give you the opportunity to sell the property yourself before repossession, which can ease the pressure.
