Most CF6 revision stops at completion. The syllabus does not, and the final section of the paper often deals with what happens when payments stop. It is also the part of the exam where the right answer is usually the most human one.
The MCOB standard
A lender must deal fairly with a borrower in payment difficulty. In practice that means:
- Contacting the borrower promptly and providing clear information about the arrears and the charges applied
- Providing the regulator information sheet on arrears
- Considering the borrower circumstances and any proposal they make
- Not pressing for unrealistic payments
- Only charging arrears fees that reflect a reasonable estimate of the cost of the extra administration
- Treating repossession as a last resort, after all reasonable attempts to resolve the position have failed
A borrower cannot be treated as being in arrears simply because a payment date has passed if the shortfall is trivial, and a lender must not start possession proceedings while a genuine proposal is being considered.
Forbearance options
| Option | Effect | Risk to borrower |
|---|---|---|
| Extend the term | Lower monthly payment | More interest overall, may run into retirement |
| Switch to interest only temporarily | Substantially lower payment | Capital not reducing, needs a plan to revert |
| Capitalise arrears | Arrears added to the balance and spread over the term | Higher balance and more interest |
| Payment concession or reduced payments | Short term relief while income recovers | Arrears continue to build unless agreed otherwise |
| Payment holiday | No payments for an agreed period | Interest still accrues |
| Assisted voluntary sale | Borrower sells with lender cooperation | Loss of the home, but usually a better price than a possession sale |
State support may also be relevant. Support for mortgage interest is available as a loan to eligible claimants after a qualifying period, is secured on the property, and covers interest up to a capped amount rather than the full payment.
The possession process
Possession requires a court order for a residential property. The lender must comply with the pre action protocol, showing the court what it has done to resolve the arrears. The court can adjourn, suspend or postpone an order where the borrower can clear the arrears within a reasonable period, which the courts have been willing to treat as the remaining term of the mortgage.
After possession the lender has a duty to obtain the best price reasonably obtainable, must account to the borrower for the sale proceeds and, where there is a shortfall, must notify the borrower promptly if it intends to pursue it. In Scotland the process differs, using calling up notices and the sheriff court.
Where the borrower has a second charge
The first charge is paid first from sale proceeds. A second charge lender can still apply for possession, and negative equity on the first charge does not remove the second charge holder legal remedies against the borrower. This is why substituting unsecured debt with a second charge must be explained carefully.
The protection conversation
A mortgage recommendation is incomplete without one. The exam expects you to name the right product for the right risk.
- Death. Decreasing term assurance for a capital and interest mortgage, level term for interest only, written in trust for unmarried borrowers and considered carefully for joint borrowers
- Serious illness. Critical illness cover, often combined with life cover, sized to clear the debt or to cover a period of disruption
- Long term illness or injury. Income protection to maintain the payment, with the deferred period matched to sick pay
- Short term loss of income. Mortgage payment protection insurance, covering accident, sickness and unemployment for a limited period, typically twelve or twenty four months
- The property. Buildings insurance is a condition of the mortgage, and the sum insured should be rebuilding cost rather than market value. Contents insurance is the borrower choice
For joint borrowers, two single life policies in trust usually provide more flexibility than one joint life first death policy, and for unmarried borrowers the trust point is essential because there is no spouse exemption for inheritance tax.
What to write in the exam
If the question is about arrears, list the forbearance options with their consequences and state that possession is a last resort. If the question is about protection, tie each product to a specific risk in the borrower circumstances and explain the term, the sum assured and why a trust is or is not needed. Naming the risk before the product is what separates a pass from a good mark.