Mortgage arrears what are they and capitalising?

Leslie91

Hello all,

First time poster round these parts. I am trying to get my head around what mortgage arrears actually are.

I'm trying to help a friend whose total amount outstanding is 200K, she is paying interest only at moment for next 5 mths.

She also has arrears of 18K due to a number of missed payments going back a few years.

Isn't part of the 18K really part of the 200K?, i.e. does capitalizing the 18K and paying it off in 1 lump sum reduce the 200K by 18K or am I totally confused?, what options are open to her provided the bank will work with her on it?

Would really appreciate any advice, Tks in advance, L91.

homer911

Mortgage arrears are any payments which have been demanded by your lender (per your repayment schedule) and are unpaid. They are included in the total balance owing, therefore paying off your arrears also pays off your balance. Given the age of the arrears mentioned, I'm surprised the bank has not tried to restructure the loan, including capitalisation of the arrears. Arrears capitalisation essentially involves wiping them out and extending the loan term or increasing the remaining repayments to pay them off - this will also involve paying extra interest, so its not just a matter of paying an extra 18k at the end of the loan as in this case.

Leslie91

homer911 wrote: »

Mortgage arrears are any payments which have been demanded by your lender (per your repayment schedule) and are unpaid. They are included in the total balance owing, therefore paying off your arrears also pays off your balance. Given the age of the arrears mentioned, I'm surprised the bank has not tried to restructure the loan, including capitalisation of the arrears. Arrears capitalisation essentially involves wiping them out and extending the loan term or increasing the remaining repayments to pay them off - this will also involve paying extra interest, so its not just a matter of paying an extra 18k at the end of the loan as in this case.

Tks so much for replying.

I'm not sure I understand what you mean by "arrears capitalisation involves wiping them out"?

If the 18K is included in the 200K and they are "capitalised" and we offer to pay clear them with one lump sum payment, does this then mean the balance owing becomes 182K?.

If the 18K is included in the 200K (but nothing is done about the arrears at all) and the mortgage continues as is to end of term with all demanded payments being met, do we still owe that 18K on top at the end?

Stonewall8

Leslie91 wrote: »

Tks so much for replying.

I'm not sure I understand what you mean by "arrears capitalisation involves wiping them out"?

If the 18K is included in the 200K and they are "capitalised" and we offer to pay clear them with one lump sum payment, does this then mean the balance owing becomes 182K?.

If the 18K is included in the 200K (but nothing is done about the arrears at all) and the mortgage continues as is to end of term with all demanded payments being met, do we still owe that 18K on top at the end?

. If you pay the 18k ur balance will reduce to 182 k and if u do not make the payment but make the rest of the "demanded " payments on full and in time then yes you will still owe 18k at the end ! - if u look at it that the reason why there are 18k in arrears are because if u made all the previous "demanded" payments in full and on time then you would only owe 182k - so by paying that 18k you are reducing the balance to what it should be and hence clearing the arrs - The idea of capitalisation involves in case saying that instead of saying what u should owe at this stage to be 182k they will say at this stage u should owe us 200k - I.e adding the arrears back onto the balance of the loan, however by doing this this the terms remains the same and I.e u still have to pay it back in the original time and there fore increasing the monthly repayment accordingly .hope this helps