The current economic downturn could well have repercussions for homeowners, many of whom require the assistance of a mortgage in order to purchase a home.

A mortgage is a contract between a borrower and a lender that sets out the terms by which the lender agrees to loan money to purchase the property, and the borrower agrees to make regular payments plus interest to return the loan in a set time. The borrower also agrees that the lender has the right to foreclose on the mortgage and take possession of the property if the borrower is unable to meet the regular payments. Homeowners should attempt to avoid this at all costs. If a borrower falls into arrears with mortgage repayments the borrower must take action to avoid loss of the mortgaged property.

The initial course of action is one of self-help. It's important to notify the lender immediately of any financial hardship. Lenders are often willing to discuss the situation with borrowers; after all, the lender wants to see its money returned. An accommodation with the lender regarding the amount and timing of payments is a possibility, or the lender may be willing to assist in reviewing the borrower's budget in order to make payments more affordable. It is important that the borrower shows that best efforts are being made to repay the lender.

A borrower may need to cut out luxury expenditures such as overseas holidays, restaurant meals, spa treatments, and other treat yourself expenses, in order to re-direct money towards the mortgage. It's worth the sacrifice so that the borrower can retain the property.

If the borrower is still unable to keep up the mortgage repayment then it may be time for more drastic changes. The borrower might consider moving to a cheaper rented property or moving in with family members and renting out the mortgaged property. The borrower should be aware that, depending on the terms of the mortgage, renting out the property might require the consent of the lender. If the borrower has spare rooms in the mortgaged property, taking in a lodger or two is also an option.

Ultimately, the borrower may decide to sell the property, which may also require the consent of the lender, in order to repay the outstanding mortgage amount. Depending on the sale price achieved, the borrower might retain some profit. The sale option may not be appealing to a borrower, but property repossession by the lender is even worse as it will affect the borrower's credit rating for years.

When all alternative approaches have been tried and found to be unsuccessful and the mortgage is still in arrears, the lender may issue proceedings in the Supreme Court seeking an order for possession of the property in accordance with the terms of the mortgage agreement. Unless the borrower is able to pay the arrears on the mortgage, the court will in most circumstances grant the lender the possession order being sought. Once the order has been granted, the court bailiff will be authorised to take physical possession of the property and evict the borrower and any other occupiers. The borrower will no longer have any rights over the property. The lender will sell the property at auction or by private sale with the aim of obtaining the best price.

If the proceeds of the sale are insufficient to clear the borrower's debt to the lender including the money loaned, arrears, interest and costs of the court proceedings, the lender will seek a judgment against the borrower for the difference.

Losing possession of a property is the last thing a homeowner wants. If a borrower foresees financial hardship, it is vital that the borrower notify the lender and work together to find alternative ways to maintain the mortgage payments.

Attorney Anna Knapman-Scott is a member of the Litigation and Insolvency Practice Group at Appleby. A copy of Ms. Knapman-Scott's column can be obtained on the Appleby website at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.