Is termination of a mortgage contract by the bank possible?

A mortgage contract is made between a borrower and a lender (usually a bank) for a specific purpose. The borrower does not have enough money to buy a property, so borrows it from a lender. Lenders earn money from lending, so the mortgage terms include conditions that protect the lender’s money and that the borrower must keep to.

Can the bank terminate my mortgage contract?

If you seriously breach your mortgage terms, for example by falling into long-term arrears, the lender can take legal action and ask the court for a possession order. The purpose is to protect the lender from financial loss and to enable it to recover the money lent. For regulated residential mortgages, FCA rules say a lender must not repossess unless all other reasonable attempts to resolve the situation have failed.

When can a lender take action on your mortgage?

Several situations can lead a lender to take action. Most of them involve a breach of the terms and conditions of your mortgage. Lenders include these conditions because they treat the situations they cover as risky.

Instalment payment delays of several months

The main situation that UK lender rules and court procedures deal with is long-term mortgage arrears. A missed or late mortgage payment can be recorded on your credit report, where it stays for six years, and some lenders take it into account, so it can make borrowing harder. Its impact reduces as the record ages. However, falling behind with a few payments does not automatically lead to repossession. There is no fixed number of missed payments: what happens depends on the arrears, your contact with the lender and any arrangement you agree.

FCA rules require lenders to deal fairly with customers in payment difficulties, make reasonable efforts to agree how arrears will be repaid, and consider options such as extending the term, changing the mortgage type or deferring payments. These FCA rules apply to regulated residential mortgages; most buy-to-let mortgages are not covered. The options can include:

• Deferment of instalments;

• Reducing the amount of instalments for a period of time;

• Spreading the arrears into instalments;

• Extending the term of the mortgage while reducing the monthly instalment.

The property is being used in a manner incompatible with its intended use

Your mortgage states what type of mortgage you have, based on its purpose. Most mortgages are for residential properties where the borrower lives. Another type is buy-to-let mortgages, which are for buying rental properties. Lenders care about the property being used for its intended purpose, as buy-to-let mortgages usually require a larger deposit and tend to have higher interest rates.

This works both ways. You usually cannot live in a property bought with a buy-to-let mortgage. If you move into such a property, it is no longer let as an investment, so the risk to the lender changes.

Fraud, illegal use or neglect of the property

Knowingly giving false information on a mortgage application, for example about your income, is mortgage fraud. It can breach the mortgage terms and may be a criminal offence.

Other breaches can relate to the property itself. Illegal use of the property, failing to keep required buildings insurance or letting it fall into serious disrepair can breach the mortgage conditions.

Changes to your residence status or moving abroad

If your immigration or residence status changes during the mortgage term, or you are moving abroad permanently, check your mortgage terms and tell your lender about any change the terms require you to report. Keep up your repayments and stay in contact with your lender. How the lender responds depends on your mortgage terms and your payment record.

Is repossession a last resort?

For regulated residential mortgages, repossession should be a last resort: FCA rules say a lender must not repossess unless all other reasonable attempts to resolve the situation have failed. Repossession is a poor outcome for both sides, as the borrower loses the property and the lender does not receive the repayments it expected. FCA rules require lenders to deal fairly with customers who are having difficulty paying their mortgage. If you contact your lender, the lender should discuss options with you, which may include deferring payments, temporarily reducing them or extending the mortgage term.

What does this look like in practice?

The lender may also be willing to discuss changing the terms of your mortgage. If you want to rent out a home that has a residential mortgage, ask your lender first. Some lenders may agree to consent to let for a temporary period; otherwise you may need a buy-to-let mortgage, which has different criteria and a separate application. Buy-to-let affordability is assessed differently: lenders check whether the expected rent covers the mortgage interest (an interest coverage ratio test) and, where they also rely on your personal income, assess that income together with your credit commitments and outgoings.

If your circumstances have changed, for example after a change of job, contact your lender early. Your loan-to-value (LTV) ratio can affect which options are available.

For a regulated residential mortgage, the lender must discuss the arrears with you and give you information and notice before it starts a possession claim.

What if my lender takes court action?

If the lender calls in the loan, it may demand the whole outstanding balance. However, in England and Wales, when a lender asks the court for possession of your home, the court can adjourn the case or suspend a possession order if you are likely to be able to pay what you owe within a reasonable period, and it may treat as due only the payments you would normally have made. For regulated residential mortgages, the steps expected before a claim are set out in the Pre-Action Protocol for Possession Claims based on Mortgage Arrears.

If the court makes an outright possession order, or you do not keep to the terms of a suspended one, the lender can take possession of the property and sell it. Any money left after the mortgage and costs have been repaid, and after any other lenders with a charge on the property have been paid, will be paid to you. If the sale does not cover the whole debt, you still have to pay the difference. A repossession is recorded on your credit file and can make future borrowing harder.

The court process described here applies in England and Wales; Scotland and Northern Ireland have their own procedures. For more information, see GOV.UK: Repossession.