"If Tanager reduces the arrears, why don't they reduce the mortgage balance?"

[Brendan Burgess]

I was asked this a few times recently, so I will attempt to explain it. It's complicated and it would help if you read "Capitalizing Arrears Explained" first.

Let's say you have a normal mortgage of €100,000 over 20 years at 5%.
Your repayments are €660 per month.
Assume you make all your repayments on time.
At the end of the first year, you will owe €97,000.


Now, lets assume you still owe €100,000, but this includes €20,000 arrears.

If you had not built up any arrears, your mortgage balance would be €80,000.

So Tanager has two correct options
1)They can capitalise the arrears. This means that you owe €100,000. With 20 years to go on your mortgage at 5%, the repayment will be €660 per month. But they will not be asking you to pay the €20k arrears.
or
2) They can insist on your paying your arrears of €20,000
If you pay the €20,000, the balance will be €80,000 and the repayments will be €530 a month.

So they have a choice
1) charge you €660 per month and write off the arrears
2) Charge you €530 a month and pursue the arrears

But Tanager did both.
They said
1) You still owe us €20k arrears
and
2) Your new repayment is €660 per month.

So you are overpaying your mortgage by €130 a month (€660 - €530)
At the end of the year, you have overpaid by €1,560 (€130 per month x 12)

So you don't owe €20,000 arrears, you owe (€20,000 - €1,560) = €18,440

The balance on your mortgage is still €97,000 - it's just the arrears balance is overstated.

Brendan

 

[Brendan Burgess]

By the way, if someone can come up with a simpler explanation, please do.

 

[IdesofMarch]

A High Court in Northern Ireland said that this practice was unconscionable, you cannot capitalise arrears and then rely on the same arrears to bring legal possession proceedings.

If the mortgagor paid the higher monthly payment after the automatic capitalisation of arrears took place then they can argue that they have accepted the capitalisation and that they are no longer in arrears. In layman's language, this is the alteration of the contract by the mutual behaviour of both contracting parties. The borrower must then continue to pay the higher monthly payment going forward so that at the end of the mortgage term there is no outstanding amount left to pay. If this is the case, Tanager cannot pursue the borrower for possesion for breach of the contract as there is no such breach due to the subsequent behaviour of both parties to the contract.