Falling into mortgage arrears can create immediate financial pressure, particularly when the amount owed continues to increase while you are trying to keep up with your normal monthly mortgage payments.

One option that may sometimes be considered is to add the mortgage arrears to the outstanding mortgage balance. This is commonly referred to as capitalising the arrears.

Capitalisation does not mean that the arrears are written off. Instead, the arrears are added to the mortgage balance and repaid as part of the mortgage over an agreed period.

For some borrowers, this can provide a way of bringing the account back up to date without requiring the arrears to be paid in one lump sum. However, it is not automatically available in every case, and it is important to understand the financial consequences before agreeing to it.

What Does It Mean to Capitalise Mortgage Arrears?

When mortgage arrears are capitalised, the amount you have fallen behind by is added to the outstanding mortgage.

For example, suppose your mortgage balance is £180,000 and you have accumulated £5,000 in arrears. If the lender agrees to capitalise those arrears, the mortgage balance could become £185,000.

The £5,000 has not disappeared. Instead, it has effectively become part of the mortgage debt and will normally be repaid over the remaining mortgage term.

The exact effect on your monthly payments will depend on the mortgage interest rate, remaining term, repayment method and the lender’s terms.

The Financial Conduct Authority’s current mortgage rules specifically recognise treating a payment shortfall as though it were part of the original amount provided as one possible arrangement for a customer experiencing payment difficulties.

Is Mortgage Arrears Capitalisation Allowed in the UK?

Yes, capitalisation of mortgage arrears is a recognised option in the UK mortgage regulatory framework.

However, this does not mean that a borrower automatically has a right to have their arrears added to the mortgage.

Under the FCA’s MCOB rules, a lender must consider, taking account of the customer’s individual circumstances, whether certain options are appropriate. These can include extending the mortgage term, changing the mortgage type, deferring certain payments, reducing the interest rate in appropriate circumstances and treating a payment shortfall as part of the original mortgage amount.

The lender and borrower must agree to the arrangement.

The lender must also consider the effect of the proposed arrangement on the customer’s overall mortgage balance and provide adequate information about the implications of agreeing or not agreeing to the arrangement.

Does a Lender Have to Add My Arrears to the Mortgage?

Not necessarily.

A lender does not simply have to accept a request to capitalise arrears because a borrower asks for it.

The lender should consider the customer’s circumstances and the suitability of the proposed arrangement. The FCA requires lenders to make reasonable efforts to reach an agreement about how a payment shortfall will be repaid and, where feasible, to establish a practical payment plan.

This means that the lender may consider capitalisation alongside other options rather than treating it as an automatic solution.

For example, depending on the circumstances, alternatives might include paying an additional amount each month, extending the mortgage term, changing the mortgage type or agreeing another affordable arrangement.

Why Might a Lender Agree to Capitalise Arrears?

Capitalisation can sometimes provide a practical way of dealing with arrears where the borrower can afford the resulting mortgage payments but cannot realistically clear the arrears separately.

The FCA’s guidance says that capitalisation may be appropriate where the lender reasonably considers that the customer can afford the capitalised monthly payments, other options for repaying the shortfall more quickly have been considered, and capitalisation is in the customer’s best interests having regard to their individual circumstances.

This is important because the question is not simply whether the arrears can technically be added to the mortgage. The longer-term affordability of the resulting arrangement also matters.

Could Capitalising Arrears Increase My Monthly Mortgage Payment?

It can.

If the arrears are added to the mortgage balance, you are effectively borrowing or owing more under the mortgage than before.

For example, if you have £150,000 remaining on your mortgage and £5,000 of arrears are capitalised, the balance could become £155,000.

Depending on the mortgage terms, this may increase the monthly payment.

The effect will depend on factors such as the interest rate, remaining mortgage term and whether the mortgage is repayment or interest-only.

MoneyHelper also identifies capitalising arrears as one possible way of dealing with mortgage arrears and notes that the monthly payments may increase and that the borrower may pay more overall for the property.

Could I Pay More Interest Overall?

Yes.

One of the most important points to understand is that capitalising arrears does not merely change the way the arrears are recorded.

If the arrears become part of the mortgage balance, interest may subsequently be charged on that additional amount in accordance with the mortgage terms.

This means that adding £5,000 of arrears to the mortgage does not necessarily mean that the total financial cost of the arrangement will be exactly £5,000.

The longer the additional balance remains outstanding, the greater the potential interest cost can be.

This is why borrowers should ask the lender to explain the effect of the proposed arrangement on both the monthly payment and the overall amount payable.

The FCA specifically requires lenders to provide adequate information about the implications of proposed arrangements, including the potential impact on the customer’s overall balance.

Can Mortgage Arrears Be Capitalised If I Have Previously Broken a Payment Arrangement?

This depends on the circumstances.

A previous payment arrangement that was not maintained may make it more difficult to agree another arrangement, particularly if the lender has concerns about whether a new arrangement would be sustainable.

However, the existence of a previous arrangement does not mean that the lender can simply ignore the customer’s current circumstances.

The FCA requires firms to make reasonable efforts to reach an agreement over repayment of a payment shortfall and to consider the customer’s individual circumstances when assessing possible arrangements.

The important issue is therefore likely to be whether a proposed arrangement is realistic and affordable based on the customer’s current financial position.

What If the Mortgage Balance Is Already Close to the Property Value?

This can be particularly important.

Suppose a property is worth £200,000 and the existing mortgage balance is £195,000. If £10,000 of arrears were added to the mortgage, the resulting balance could be around £205,000.

That would place the mortgage balance above the property’s value.

This is an example of negative equity. MoneyHelper explains that negative equity occurs when the amount owed on a mortgage is greater than the value of the property.

A lender may therefore take the property’s value and the overall balance into account when considering whether a particular arrangement is appropriate.

MoneyHelper specifically notes that capitalising arrears may be more difficult where the mortgage balance plus arrears would exceed the property’s value.

Can Capitalising Arrears Stop Repossession?

It can potentially help resolve the arrears situation, but it should not be viewed as an automatic protection against repossession.

If a lender agrees to a suitable arrangement and the borrower then maintains the agreed payments, the account may be brought back into a more manageable position.

However, every case is different.

If the borrower cannot maintain the new arrangement, or if no reasonable arrangement can be reached, the lender may continue with the appropriate recovery process.

The FCA’s current rules state that firms must make reasonable efforts to reach an agreement over repayment of payment shortfalls and, where feasible, establish a practical payment plan. They also state that a lender should not repossess the property unless all other reasonable attempts to resolve the position have failed.

This is one reason why it is important not to wait until possession proceedings are well advanced before discussing the arrears.

What Information Should I Ask the Lender For?

If your lender proposes capitalising your arrears, or you are considering asking for it, you should understand exactly what the arrangement would mean before agreeing.

Ask the lender to confirm the current mortgage balance, the amount of arrears, the amount being proposed for capitalisation, the new balance and the expected monthly payment.

It is also sensible to ask how long the arrangement will last, what interest rate will apply and what the estimated overall cost will be.

You should also ask how the arrangement will be reported to your credit file.

The FCA’s rules specifically require adequate information about the implications of a proposed arrangement, including its potential impact on the overall mortgage balance and how it will be reported to the customer’s credit file.

Keep copies of the lender’s correspondence and any proposal or agreement you receive.

What If I Cannot Afford the Capitalised Payment?

This is an important point.

Capitalising arrears is only useful if the resulting mortgage payment is realistically affordable.

If adding the arrears to the mortgage would result in a payment that you cannot maintain, agreeing to the arrangement may simply create another problem later.

MoneyHelper recommends contacting the lender as soon as possible if you are struggling with mortgage payments. It also explains that lenders must treat borrowers fairly and consider requests to change the way mortgage payments are made.

Other possible options may need to be considered depending on the circumstances.

These could include extending the mortgage term, changing the repayment structure, agreeing an affordable repayment plan or considering whether a sale or remortgage is realistically possible.

The appropriate option will depend on the individual circumstances, mortgage terms, property value and affordability.

Can a Lender Refuse to Capitalise Mortgage Arrears?

Yes, a lender may refuse a particular proposal where it does not consider the arrangement appropriate.

However, refusal of one particular solution does not necessarily mean that there are no other options.

The FCA rules require lenders to make reasonable efforts to reach agreement over repayment of a payment shortfall and to allow a reasonable period for repayment, having particular regard to establishing a practical payment plan where feasible.

If capitalisation is refused, it can therefore be useful to ask the lender why it has been refused and what alternative arrangement it is prepared to consider.

This can be particularly important where the borrower has provided an income and expenditure assessment showing what they can realistically afford.

What If I Am Already Facing Repossession Action?

If court or possession proceedings have already started, the position becomes more urgent.

You should not assume that because you are discussing capitalisation with the lender, any court proceedings have automatically stopped.

Make sure you understand what stage the possession process has reached and comply with any court deadlines.

If appropriate, you may also wish to continue discussing an affordable solution with the lender while the legal process is ongoing.

Our guide on the mortgage repossession process in the UK explains the general stages that can arise when mortgage arrears progress towards possession:

https://www.immediatebankclaims.co.uk/2026/06/26/mortgage-repossession-process-uk-2026/

You may also find our article on how many mortgage payments can be missed before repossession useful when considering the wider process:

https://www.immediatebankclaims.co.uk/2026/08/04/how-many-mortgage-payments-before-repossession-uk/

Capitalising Arrears Is Not the Same as Writing Them Off

It is worth emphasising this distinction.

If a lender agrees to capitalise £5,000 of mortgage arrears, you have not received a £5,000 reduction in your debt.

The £5,000 has been moved into the mortgage balance and will generally remain payable under the revised mortgage arrangement.

The potential benefit is that the arrears can be spread over a longer period instead of requiring a separate lump-sum payment or a large additional monthly payment.

The potential disadvantage is that the mortgage balance increases and the borrower may pay more interest over time.

The decision therefore needs to be considered in the context of the borrower’s overall financial position.

What Should You Do If You Are in Mortgage Arrears?

If you are already in arrears, the most important step is usually to understand exactly what you owe and communicate with the lender.

Do not assume that ignoring correspondence will make the problem disappear.

Ask the lender for an up-to-date statement showing the mortgage balance, arrears, payments received and any charges that have been added.

MoneyHelper states that where a borrower falls into arrears, the lender must provide information including the total arrears, missed or partly paid payments, the exact amount outstanding under the mortgage and relevant charges within the specified period.

You should then consider what you can realistically afford rather than simply offering an amount that is unlikely to be sustainable.

If you are considering capitalisation, ask the lender to explain the proposed arrangement in writing and make sure you understand how it will affect your monthly payment, total balance and longer-term cost.

If you are already dealing with a payment arrangement or have concerns about repossession, it may also be useful to read our article:

Can a Mortgage Lender Refuse to Accept a Payment Arrangement in the UK?

https://www.immediatebankclaims.co.uk/2026/09/07/mortgage-lender-refuse-payment-arrangement-uk/

Final Thoughts

Mortgage arrears can sometimes be capitalised and added to the outstanding mortgage balance, but this is not an automatic right and it is not necessarily the right solution in every case.

The FCA’s current rules require lenders to consider the individual circumstances of customers experiencing payment difficulties and, where appropriate, consider options including treating a payment shortfall as part of the original mortgage amount. The lender must also explain the implications of the proposed arrangement, including its effect on the overall balance and credit-file reporting.

For a borrower, the key question is not simply whether the arrears can be added to the mortgage. The more important question is whether the resulting arrangement is affordable and sustainable.

Before agreeing to capitalisation, make sure you understand the new mortgage balance, monthly payment, interest implications and how the arrangement will affect your circumstances.

If you are struggling with mortgage arrears, early action can give you more opportunity to explore the available options before the situation becomes more serious.

Disclaimer

Immediate Bank Claims is not a firm of solicitors or barristers; it provides independent support, guidance and assistance relating to property repossession, mortgage arrears, LPA receivers, debt matters and related issues. The content of this article is provided for general information only and does not constitute legal or financial advice. Individual circumstances vary, and appropriate professional advice should be obtained where required.