Helped to pay someone else's mortgage?

Posted in 'Dealing with Debt' by Barry Stamp

29 November 2011

If you have ever helped a friend or relative with their mortgage payments, then you may be surprised to learn that the lender might eventually owe you something back.

If you make payments, in full or in part, to a secured lender for someone else’s debt, and if your help wasn’t enough to stop the lender taking action to repossess the mortgaged property, and selling it, then you may well have a legal right to a share in the net sale proceeds – i.e. the amount left after the property is sold and the mortgage paid off. The lender can’t just hand the surplus proceeds back to the borrower without taking account of what you have paid, if it is aware that you have helped with mortgage payments.

You have rights of subrogation, and rights of contribution, which arise from very old and very complex law – namely the Mercantile Law Amendment Act 1865.

What that law basically says is that if you pay off a debt in full, then you acquire full rights to the security held by the lender. The lender cannot just give the security back to the borrower without your permission. This is called subrogation, which means that you ‘stand in the shoes’ of the borrower in terms of having rights to the security given by the borrower. This ‘security’ might not just be a mortgage over property, but also any other security the lender holds, such as life policies.

Also, if you make payments (but not enough to pay off the debt in full) then you acquire rights of contribution. After selling the mortgaged property, and if in possession of surplus monies, the lender should work out what you are due back and refund you. But because the calculation is just impossibly tricky to get right, the usual practice is that the lender will seek the joint authority of you, the borrower, and of anyone else who it knows has helped to pay the mortgage, as to what to do with the surplus proceeds.

If the lender can’t get the authority or agreement of all persons who have contributed to repay the mortgage, it will simply surrender the surplus money to the Court, and each of you will have to fight for your share.

The key to all this is that when you help a relative, the lender must be made aware, so they can then be on notice of possible rights of contribution and subrogation. Sometimes it can be obvious, such as happens during mortgage arrears counselling when a relative comes forward and offers to pay off all (or some of the) arrears. But when payments are made by you to your relative informally, and then the relative makes the payment as usual, the lender can’t know what’s going on and you’ll be unlikely to acquire any rights.

If you find yourself in a position where you want to help a relative, it’s always best to make the payments direct to the lender, not just to ensure that your rights then become clearly evident, but also because it is a sad fact of life that sometimes your payment doesn’t reach the mortgage lender at all.

The same laws apply to guarantors who are called to pay under guarantees given. They too acquire rights of subrogration, and in this instance the right is obvious to the lender.

Anyone suffering from debt stress should always try to seek help at the earliest opportunity – and our Debt Advice Centre is a good place to start. Although the law surrounding rights of subrogation and rights of contribution are complex, our advice is laid out simply and in Plain English.

Visit our Debt Advice Centre