There's a clause in many mortgage contracts that secures all your debts.
How would you feel if you failed to pay your credit card bill and, as a result, your mortgage lender used an obscure clause in your mortgage contract to try to repossess your home?
No, I’m not joking. Believe it or not, many lenders, such as Natwest, Royal Bank of Scotland and HSBC, place just such a clause into their mortgage contracts.
It’s called an 'All Monies Charge' clause and it allows your mortgage lender to try to repossess your home if you fail to keep up payments for any debt you have borrowed from that lender.
This includes debts you understood were unsecured, such as personal loans, overdrafts and credit cards, as well as the mortgage. Effectively, all the debt you have with your mortgage lender become secured against your home, and put your home at risk.
After a lovemoney.com reader wrote in to tell me about his experience with HSBC, I discovered that many other lenders have sold mortgages with these clauses in too, and do so regularly. Indeed, I have found evidence of these charges going back at least 30 years.
You win some, you lose some
I have read conflicting reports with how the courts have dealt with these charges, which means the precise circumstances of each case appears to be relevant. One customer suffered as the court awarded his lender an order repossessing his home based on the fact he defaulted on unsecured (as well as secured) debts.
Other customers have avoided it. There was a case where the lenders' request for an order of possession was rejected on the basis of the wording elsewhere in the mortgage contract. Another judge ruled that, whilst the customer had significant debt and couldn't pay, his initial mortgage debt had been paid off and therefore the clause was released.
Do you know about this clause?
As lenders are the specialists selling us their products, we should expect them to be able to explain everything clearly to non-specialists, i.e. most of the public. Yet despite this clause being common practice, it's is not very well known or understood, which suggests it's not being explained clearly enough.
When you take out a loan or credit card from the same lender it will be sold to you as an unsecured debt. Hence, anyone not in the finance industry (or the industry of deciphering small print) could be doubly forgiven for not putting all the clauses from your various contracts together.
When you're looking for a new mortgage, you could ask your lawyer if there is such an offending clause and if so ask for it to be removed. If that fails, it's normally easy to avoid the potential consequences: do not take out any unsecured loans, credit cards or overdrafts with the same lender.
All debt can become secured
It's not just mortgage-holders who need to beware of their unsecured debts turning into secured ones. All unsecured debt can be converted into secured debt, whether or not you have a mortgage.
What happens is, you miss several payments on your loan or credit card, you continue to be unable to pay, and negotiations on repayments fail. The lender then asks the court for a charging order on your property. The court will always grant these orders unless there is a technical irregularity. A charging order means that when the property is sold, the lender can take a piece of it. These are not uncommon and have been used more frequently in the economic woes of the past few years.
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After obtaining a charging order, the lender can also ask the court for an order for sale, which will force a sale of your property. Here, the judge is able to use discretion. If the debt is much smaller than your equity in the property, the order probably won't be granted. Families with young children might be saved too, or at the least can expect much more time before the order will come into effect.
Considering we pay much higher interest rates for the privilege of unsecured debt, this doesn't seem right. If these debts were called by a more accurate name, such as 'convertible debts', perhaps we wouldn't pay such a high price for them.
It's just more ammunition
You may now be wondering why we need to worry about the all monies clause that I wrote about at the beginning at all, since lenders can get a charging order on all unsecured debt so easily.
I think the answer is that you don't want to give lenders more ammunition. The more options they've got, the more likely they are to try to use one and for it to be effective. What's more, if your unsecured debts are with another lender and you manage to keep your mortgage lender reasonably happy, you’re less likely to be forced out of your property.
If you feel you've been treated unfairly by any of your lenders, don’t forget you can complain to the Financial Ombudsman Service.
Share your experiences
Have you ever been caught out by the All Monies Clause? Do you think it’s right that lenders put such clauses in mortgage contracts? Tell us your thoughts using the comments box below!
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