A default notice is a formal letter sent from a creditor (such as a bank or mortgage lender) to a borrower to notify them that they have missed a loan repayment.
When you receive a default notice, you have a statutory 14-day period to make a payment to right the arrears under UK law.
If the arrears are not paid back within this time period, the lender has the right to take you to court to reclaim your debt.
Default notices are served under the Consumer Credit Act 1974 and range from credit cards and personal loans to mortgages, as well as hire purchase items like cars, furniture, and electronics. In this article, we look at how default notices apply to residential mortgages.
Getting a default notice for your mortgage can be scary, and has long-term consequences. However, this does not mean you will lose your home.
What is a mortgage default?
A mortgage default is a missed payment on your mortgage. Technically, any missed payment on a mortgage is a default.
Most lenders do not operate on this basis, however, and will only consider a missed payment a default if it has resulted in them sending an official default notice.
Generally, lenders have a grace period. This is a specific timeframe in which arrears can be paid back with no consequences. The length of this period can vary wildly from lender to lender and typically ranges from 5 to 20 days.
Note that a grace period is not a legal obligation, and sometimes, a lender may allow a grace period on one occasion, and then send a default notice on another.
No matter its length, if you fail to make the required payment within the grace period, your bank will eventually send you a default notice.
Getting a default notice will normally lead to your lender charging you additional interest and can potentially also result in a late fee.
What are the consequences of receiving a default notice?
Receiving a default notice can have substantial and potentially severe consequences.
While lenders and banks will currently wait a year before pursuing legal action to reclaim their debts, a default notice is still the first step in them taking you to court to reclaim what they are owed.
If legal action does take place, and no agreement has been made concerning repayment, there is a real possibility that the worst will happen. The court will issue a possession order in favour of the lender, allowing them to repossess your home.
Having your home repossessed can cause a great deal of worry and anxiety for your family life, mental health and financial situation.
Typically, banks will charge a late fee, and the missed payments often accrue interest, building your arrears up to more than what they would have been otherwise.
In addition, when you receive a default notice your lender will report it, and the missed payment, to credit reference agencies. These agencies control your credit score and will put the default notice down as a black mark, damaging your rating for as long as seven years on your credit record.
This damage to your credit rating will make it more difficult and expensive to secure a loan or mortgage in future and can even impact things like finding employment or rented accommodation. This is because some landlords and employers look at credit scores as part of their background checks and take a poor score as an indicator of unreliability.
How should you react to a default notice?
Receiving a default notice can be a daunting experience, but taking proactive steps can help navigate through this challenging time and minimise any further consequences you could face.
Here we consider five key steps to follow when receiving a default notice.
1. Check the details are correct
The first thing you should do upon receiving a default notice is to check the details are correct.
Ensure your name, address, and the amount owed are as you expect. While lenders do not generally make mistakes, you should not assume they are right.
Once you have checked through the default notice’s details, you should proceed to the next step.
2. Seek legal advice
As you explore ways to stop your property being repossessed, it is wise to seek legal advice and promptly. A legal professional can provide insight into your rights and the implications of the default notice, guiding you on the most suitable course of action.
This is particularly important if you believe the bank has made a mistake with the amount owed. As previously said, large lenders tend not to make mistakes, and getting a professional second opinion before making an argument along such lines is critical.
If you cannot afford to pay for professional legal services, there are several options still available.
First, you should check if you are eligible for Legal Aid. Legal Aid is a program in the UK which provides legal help and advice to people who otherwise could not afford it. It can be free, or a repayment plan may be arranged.
You can check your eligibility for Legal Aid via the UK Government Website.
Even if you are not eligible for the program, some other bodies offer free or low-cost legal assistance. These include the Money Advice Service, National Debtline, LawWorks, Advocate, and the Step Change Debt Charity.
After securing legal advice, it is time to move on to step 3.
3. Communicate with your lender
Communicating with your lender in the right manner is critical.
While you should have been in communication with your lender in the period leading up to the default notice, late is better than never.
If you are in a situation where you can pay your arrears, now is the time to do so. The default notice will contain a clear way to pay back what you owe. If you are struggling to make the payments, you can discuss a repayment plan with your lender.
4. Explore repayment plans
If you cannot pay off all your arrears immediately, you can seek to arrange a repayment plan.
You have a couple of options here. Firstly, you can go to your bank or lender and ask them for help with arranging a plan. Alternatively, you can propose one yourself.
You should produce a proposal to offer the bank with the aid of your legal adviser. They should be able to help you create a plan which is both acceptable to the lender and also manageable for you.
The plan could include things like an extended loan term and temporary payment reductions, as well as a gradual repayment of the arrears.
5. Consider switching to an interest-only mortgage product
If you have not already, switching to an interest-only mortgage could be an option to reduce your financial strain. This could lower your monthly payments by you only having to make payment of the interest element of your mortgage, providing temporary financial relief.
However, it is crucial to understand that by going down this path, your mortgage loan amount will remain unchanged and you will still need to plan for repaying the mortgage in full at some point in the future.
How do you prevent yourself from receiving a default notice?
While in theory, avoiding a default notice merely means making timely mortgage payments, the reality often proves more challenging. This is especially the case during financial hardships. In such situations, a proactive approach becomes essential in managing mortgage obligations.
The fundamental defence against a default notice is regular and timely mortgage payments. Establishing automatic payments or setting reminders can be instrumental in ensuring you never miss a due date. Additionally, devising a budget that prioritises your mortgage payments is critical. By meticulously monitoring your finances, you can effectively allocate funds to meet your mortgage commitments.
Should you foresee financial hurdles that could impede your ability to make payments, it is prudent to engage with your lender at the earliest point. They may propose solutions like payment deferrals or modifications to your loan to ease the management of your payments. If circumstances allow, refinancing your mortgage or extending the loan term could help reduce your monthly payments, making these more manageable.
Building an emergency fund can be one way of meeting unexpected expenses. Having a safety net can ensure you continue making mortgage payments even during tough times.
It is also advisable to consult a financial adviser to explore viable options for effectively managing your mortgage. Professional advice can bring about strategies to avoid financial pitfalls that may result in default notices.
How does a default notice affect co-signers?
Co-signing a mortgage means agreeing to share the responsibility of a loan alongside the primary borrower. As a co-signer, you pledge to repay the loan if the primary borrower is unable to do so, serving as a form of assurance for the lender.
Typically, individuals co-sign mortgages for close family members or friends who may not meet the qualifications for a mortgage due to poor credit, inadequate income, or a lack of employment history.
Upon co-signing or acting as a guarantor, you legally assume the debt obligations in the event of a default by the primary borrower. This signifies that if the borrower whose mortgage you have co-signed misses some of their payments and defaults, the lender may seek payment from you, the co-signer or guarantor. This could lead to collections or legal actions if the payments are not made.
Moreover, a default on your guaranteed mortgage will adversely affect your credit rating, a scenario that remains unchanged even if you settle the defaulted amount later.
In summary
In this article we have delved into mortgage default notices, discussing what they are, their consequences, and how to deal with and avoid them.
By ensuring that you maintain your agreed payments to your creditors you can avoid defaulting on your mortgage payments.
Failing to do so, and receiving a default notice can carry long-term consequences, including damage to your credit score, court action and eventually home repossession.
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