Can your lender add mortgage arrears to the balance?

Capitalising arrears means your lender adds the payments you have missed to the total amount you owe on the mortgage, so the arrears stop being a separate debt and are repaid over the remaining life of the loan¹. It is sometimes called capitalisation of arrears. It is not automatic and it is not a right: the lender decides whether to offer it, and it normally expects your finances to have recovered first³.

The trade-off is straightforward. Your monthly payment usually goes up, because the lender recalculates it to clear the original mortgage plus the added arrears over the time left on the loan⁴. Future interest is charged against the bigger balance, which can increase the overall cost of the mortgage⁵. What it buys you is breathing space: the arrears are no longer a lump sum you have to find on top of your normal payment.

If you are behind, the first step is to talk to your lender. Lenders will usually suggest a way to pay off the arrears gradually alongside your usual payments, and they will usually delay repossession action if you can show you are prioritising the mortgage and can pay the arrears off over time⁶.

Capitalising arrears adds what you owe to the mortgage balance

When a lender capitalises arrears, it takes the missed payments and folds them into the capital you originally borrowed⁸. Instead of two debts, a mortgage plus a separate arrears balance, you have one larger mortgage. The arrears are then spread across the time left on the loan rather than being cleared in a lump sum⁸.

Lenders describe the same mechanism in their own support material. One lender says it may consider capitalisation of arrears, adding the arrears to the total amount owed and paying it back over the remaining term of the mortgage⁹. Another sets out the effect on repayments: they are recalculated on the basis that you are paying off the mortgage amount plus the missed payments that have been added to it, which means the repayments increase⁴.

Whether a lender will consider it at all often turns on the loan to value. If your home is worth more than the mortgage you have, your lender might let you add your arrears to the total amount you owe¹. Where the mortgage is close to or above the value of the property, there is less room for the lender to do this, and other options may be the only ones on the table.

It is worth being clear about what capitalisation is not. It does not write anything off, and it does not change the fact that the payments were missed. It changes the shape of the debt, from a shortfall to be cleared quickly into a longer, larger mortgage.

How capitalised arrears are repaid over the rest of the mortgage

Once the arrears are added to the balance, they are repaid through your normal monthly payment over the remaining term. The lender recalculates the payment so that the original borrowing plus the added arrears is cleared by the end of the mortgage⁴. The longer the term left to run, the smaller the increase in each payment, but the more interest is paid over time.

The size of the change depends on the numbers involved. As a rough illustration of how balance size drives monthly cost, a £100,000 repayment mortgage at 4.5% over 20 years would rise by £13.57 a month if the rate went up by 0.25 percentage points, and a £150,000 mortgage on the same terms would rise by £20.37¹⁰. Those figures are about a rate change, not arrears, but they show how a larger balance or a higher charge translates into a monthly figure.

If you have an offset mortgage, the picture is slightly different. Your capital repayments are still based on the full loan amount, even though the offset arrangement reduces the amount of interest you pay⁶. So capitalising arrears on an offset deal still increases the capital you are paying down.

Other ways to repay mortgage arrears

Capitalisation is one option among several. Lenders and advisers set out a range of ways to clear arrears, and which one fits depends on how much you owe, how much you can afford and how long is left on the mortgage¹¹.

• Increasing your repayments. You pay a set extra amount each month on top of your normal payment until the arrears are cleared¹¹.
• Delaying arrears payments. The arrears are put on hold for an agreed period, usually while your finances recover, and repaid later¹¹.
• Extending the mortgage term. Stretching the loan over more years lowers the monthly payment, freeing up money for the arrears. This option applies to repayment mortgages¹¹.
• Switching to interest-only for a period. Your monthly payment covers interest only, and the difference goes towards the arrears. Some lenders refuse this if the mortgage is already in arrears¹¹.
• Remortgaging. Moving to a new deal can release equity or reduce your monthly payment, which can help you clear arrears¹².

It may be possible to negotiate with your lender to reduce your monthly payments by extending the term of your mortgage or switching to a different repayment method¹³. Lenders will usually suggest a way to pay off the arrears gradually alongside your usual payments⁶.

When your lender may agree to capitalise arrears

The decision sits with the lender, and most lenders will usually expect you to meet your regular mortgage repayments for at least six months before they will agree to capitalise the arrears³. That condition matters: capitalisation is generally treated as a step for someone whose situation has stabilised, not as a first response to falling behind.

You can normally only add your arrears to the rest of your mortgage when your financial situation improves³. Where a lender is considering extending the term instead, the likelihood of agreement usually depends on how large your arrears are, your age and expected retirement date, whether you have a permanent job, and the remaining term on the mortgage³.

Some lenders will refuse to allow you to pay interest only if your mortgage is already in arrears, which removes one of the alternative routes³. That makes the conversation with the lender more important, not less.

If your case does reach court, contact the lender directly or through an advice worker or your solicitor before the court date to make a proposal to pay the mortgage instalments and pay off the arrears within a reasonable time, and let them know if you have put the house up for sale or plan to do so shortly¹⁴. If the arrears arose because of illness or a medical condition that may prevent you from working or making payments for a period, bring a letter from your GP, consultant or medical social worker explaining your condition¹⁴.

Does capitalising arrears clear the missed payments from my record?

No. Missed mortgage payments are recorded on your credit file, and capitalising the arrears does not remove that record¹⁵. The history of the missed payments stays on your file, and lenders looking at a future application will see it.

There is a related point about arrangements. Where a reduced payment or interest-only arrangement during illness leaves a shortfall, that shortfall becomes agreed arrears and can be recorded on the consumer's credit file¹⁶. So an arrangement that helps in the short term can still leave a mark.

On a joint mortgage, a missed mortgage payment will show up on both credit reports, regardless of whose fault it was¹⁷. If one person was responsible for the payment and the other was not, both files are affected.

Is my mortgage regulated by the FCA?

The Financial Conduct Authority regulates most mortgages taken out on or after 31 October 2004⁶. Mortgages taken out before that date generally sit outside the FCA's mortgage rules, which affects how you complain and what protection applies. If you are not sure which side of that line your mortgage falls on, the lender or a free advice service can tell you.

Where the FCA rules apply, they shape what a lender can and cannot do when you fall behind, including how it must handle arrears and charges. The Financial Ombudsman Service can look at complaints about mortgage arrears charges, and it has published guidance for firms on how it approaches them¹⁶. If a complaint about how your lender handled your arrears is not resolved, the ombudsman is the next step.

Getting help if you are behind on your mortgage

Getting help and advice can stop mortgage arrears or rent arrears turning into a problem that threatens your home¹⁸. Free, impartial help is available, and using it does not damage your position with the lender.

• Debt advice charities offer free, confidential advice on arrears and the options open to you.
• Housing advice services can help with the court process and with negotiating with your lender.
• Free court representation may be available in mortgage debt and social rent arrears cases¹⁹.
• Your lender will suggest a way to pay off the arrears gradually alongside your usual payments⁶.

Tell your mortgage lender if you are getting help from a debt adviser²⁰. If repossession action starts, contact your solicitor or a free advice agency¹⁴. If you are preparing for a court hearing, get your adviser's help to prepare a budget of your income and outgoings to work out whether you can afford to pay the mortgage instalment and arrears over a period of time¹⁴.

Where a lender has agreed a forbearance arrangement, that agreement allows you to repay any missed payments²¹. In Scotland, the picture can differ: you may need to be able to find a lump sum to pay off some of the arrears, for example 50%, and make an offer to repay the rest plus legal costs²².