Is termination of a mortgage contract by the bank possible?

A mortgage contract is concluded between a borrower and a lender (usually a bank) for a specific purpose. The customer does not have enough money to buy a property, so borrows it from a separate financial institution. It is important to bear in mind that banks do not act charitably and earn money themselves from lending money - after the client has repaid the entire mortgage, their income can be as much as a second of the amount lent. These institutions have their mechanisms in place to safeguard this income and, as a result, certain customer actions are categorically prohibited.

Can the bank terminate my mortgage contract?

The bank has the right to terminate the contract. Of course, this will never happen without cause, if only because the financial institution itself earns money by granting mortgages. The purpose of termination is to protect the bank from financial loss and to enable it to recover the money lent. It therefore only takes such action as a last resort, as there is a breach of contract on the part of the customer.

In what situations do banks break credit agreements with customers?

There are several possible scenarios that could lead to the contract termination. Most of them concern breaches of the terms and conditions that are included in the contract. The provisions for certain situations are there for a reason - they are considered by institutions to be risky and dangerous to their profits. The contract is an official document that binds both parties to a specific action, so if the customer breaks it, the banks have the proof they need to obtain court approval to carry out a repossession.

Instalment payment delays of several months

The most common scenario leading to the termination of a mortgage agreement by the bank is long-term arrears of instalments. The use of the word ‘many months’ is important here. Payment defaults happen very frequently, of which they are usually one-offs. This is not a good thing and should be avoided, as any default negatively affects your credit history. However, the fact that you are late with several instalments does not automatically lead to the termination of your contract by the bank.

As well as the fact that** it is simply not worthwhile for a bank to terminate a contract**, the customer is also protected by FCA (Financial Conduct Authority) guidelines, which require institutions to be lenient with customers who are having difficulty paying their mortgage. The bank in such a situation is obliged to contact the customer, investigate their situation and consider all available options to resolve the problem before breaking the contract and taking the matter to court. These 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.

Termination by the bank is a last resort, so we are talking about delays of 6 - 12 months, a low degree of cooperation and difficult contact with the bank.

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

It is firmly stated in the contract what type of mortgage is granted. This refers to the division of mortgages according to their purpose. Most mortgages are granted for residential properties where the borrower will live. Another type is buy-to-let mortgages, which are for buying rental properties. Banks are very concerned about using the property for its intended purpose, as buy-to-let mortgages have higher interest rates and a requirement for a larger deposit.

However, this does not only work one way. Living in a property bought on a buy-to-let mortgage is also strictly forbidden. This is because the terms and interest rates of such mortgages are set on the basis of predictable returns on the investment, not the financial situation of the borrower. Once the customer moves into such a property, it loses its investment character and so the risk to the bank changes.

It is worth noting that you are not prevented from leaving such a property vacant - the bank cannot force you to rent it out.

Unlawful activities

Actions in relation to a property or a credit agreement that break the law can also lead to the termination of a mortgage agreement. One such action is mortgage fraud, which is the deliberate misrepresentation of what is usually your financial situation. For example, saying that you earn £300,000 a year, when in fact it is 10% of that amount, will definitely be treated as credit fraud. False information doesn’t just have to be about earnings - if it has influenced your mortgage decision, it is already grounds for termination.

There are also various other unlawful activities that can result in the bank breaking the contract. These can relate to the property itself, i.e., for example, carrying out illegal activities in the property such as drug cultivation, gambling or software piracy, neglecting the property and bringing it into disrepair or even failing to insure it. In practice, problems usually arise when there are delays in paying instalments - this is when various facts that were previously concealed come to light.

Loss of resident status

Here it is important to start with the fact that banks do not like to give mortgages to non-residents - it is risky and difficult for them. Therefore, such situations are quite rare. However, what if you lose your resident status during the term of the mortgage? There are several possible scenarios:

If the client has lost the right to legally reside and work in the UK

Mention of this is in the vast majority of cases written into the contract - the mortgage is granted to a person who is legally resident and working in the UK. The borrower is also obliged to inform the bank if there is a change in immigration status and residency. If the bank becomes aware that the customer has lost the right to legally reside in the UK, there is a good chance that the bank will decide to terminate the contract, particularly if the customer is late with repayments or uncooperative.

If the customer has left the UK permanently

In the case of a customer moving abroad permanently, a lot also depends on the customer’s degree of cooperation with the bank and the payment of instalments on time. If there is no problem with these factors, the bank is unlikely to take any action. However, if the instalments stop being paid, the willingness of the borrower to cooperate is low or there is no contact at all, this is a quick way for the bank to repossess the property.

How often do bank terminations occur?

As mentioned earlier, termination of the mortgage agreement by the bank is an absolute last resort. Such a turn of events is not to the liking of either party, as the borrower loses the property and the bank’s expectations in relation to the earnings on the mortgage are not met. In practice, the bank will do everything in its power to ensure that a break-up does not occur. When contacting the customer, the bank’s representatives will propose all possible solutions to the problem, including postponing the repayment of instalments (mortgage payment holidays), reducing the amount of instalments or extending the credit period. One can easily see that this very much coincides with the previously mentioned FCA requirements - the banks are not exactly doing this out of compulsion, it is simply more profitable for them.

What does this look like in practice?

In addition to the above solutions,** the bank may offer to amend the terms of the contract**. If there is a breach of contract, such as renting out a residential property, the mortgage can be converted to a buy-to-let. The most important thing in such a case is to contact the bank and the correct LTV ratio. The fact that your creditworthiness has fallen drastically, for example due to a change of job, does not mean that the contract cannot be saved, as affordability with investment mortgages is calculated according to different rules (the return on investment is also taken into account).

In any case, remember that you will never ever wake up with the sudden information that your contract has been terminated. In any case, there is a very long process of contacting the bank and trying to resolve the problem, which ends in termination as a last resort.

What if the bank terminates my contract?

If the situation escalates to the point where the bank terminates your contract, your entire debt will become due immediately. This means that you will receive a letter of demand for payment within usually 14 to 28 days. If you don’t pay the entire debt within this period (and if you have caused the bank to terminate your contract, you are unlikely to be able to do so), the lender will apply to the court for what is known as a possession order, i.e. an authority to foreclose on the property. The court will examine the case and make a judgment. There are occasions when the borrower gets more time to repay the debt or the case is dismissed because the bank has not followed the procedures, but these are extremely rare cases. Usually a possession order is issued and the property is sold by the bank. After the sale and repayment of the mortgage and costs, there may be a surplus left - in which case it will revert to you. However, if the sale does not cover the entire debt, you have to pay the difference, which means additional costs. It is worth mentioning at this point that such a turn of events would be a death sentence for your credit score, which would definitely make it difficult for you to take out any loan in the future.