What happens to a mortgage if the lender goes bankrupt and you are
paying a mortgage on that property? – Reader Question
If a building society such as, The Northern Rock, was to go bankrupt your legal requirement to pay back your mortgage remains. However, you will be paying back your mortgage to a different company. This will be whoever decides to buy the existing mortgage contracts from Northern Rock.
The mortgages of Northern Rock make an attractive purchase for other banks because they will receive your future repayments. The problem Northern Rock have is that they have a temporary shortage of funds, and customers are under no obligation to pay back extra mortgage repayments.
Therefore, you will continue to make repayments. However, it will be to a different company.
The mortgage contract will also have to be honoured by the new company. E.g. if you are on a three year fixed rate deal, this will stay exactly the same until the three year period ends.
What may change is that you will have to deal with a new mortgage company, who may offer better or worse customer service. When your fixed rate deal ends, your new company may offer different mortgage deals. However, at this stage you would be able to remortgage to another company.
In the US many sub prime mortgage dealers went bankrupt but their mortgages were sold for less than face value. This is because new buyers expect some sub prime borrowers to default.