Repossessions in the UK have been steadily rising over the past year. The latest data from the Council of Mortgage Lenders shows that possessions rose from 3,070 in the first half of 2004 to 4,640 in the first half of 2005. While any rise is obviously not a good thing, these numbers must be looked at in context. In the first half of this year, the likelihood of a home being repossessed was just 1 in 2,500, compared to 1 in 250 at the time of the last recession in the early 1990s.
Reasons borrowers struggle
The main reason for mortgage arrears is a sudden fall in income of some kind. Redundancy is one of the main causes, but reduced overtime or sudden illness can also throw borrowers into difficulties.
People on low or unstable incomes may have to borrow to make ends meet, and this can all too easily end up being secured against property, putting homes at risk. Relationship breakdowns can also trigger a financial shock big enough to send finances into a tailspin.
But another key cause of debt is borrowers over-committing themselves, for example through credit card borrowing. Particularly worrying is the trend of consolidating debt by switching from unsecured to secured lending, which puts homes at greater risk.
Peter Tutton, social policy officer at the Citizens Advice Bureau (CAB), says: People take on more credit than they can afford to pay, and are perhaps not aware of how their payments are spiralling up. Borrowers need a better understanding of credit products, and lending must be responsible.
Step by step
So what should you do if you realise you are going to be unable to meet your next mortgage payment?
Spokesman, Mike Fitzgerald, Brentwood-based, Brentchase
Financial Services, says”: The worst thing you can do is nothing. Try and tell your lender there is a problem before you miss your first payment as soon as you suspect you wont be able to make it. Keep a copy of all your correspondence. In most cases your mortgage lender will bend over backwards to help you, and they are much more likely to be sympathetic if you tell them as soon as possible. The courts, if it comes to that, will also be more lenient if you can prove you informed the lender straight away. Lenders would rather not repossess if possible it is a last resort.
The CML stipulates that when a borrower falls into arrears, the problem should be handled sympathetically and positively by lenders. Jennifer Holloway, head of corporate communications at Skipton Building Society, says. Our team is very proactive in helping borrowers to sort out their problems. Indeed, its motto is: To repossess is to fail.
The next step is to seek advice. CABs offer free advice and will spell out the various options available. Tutton says: If you have mortgage arrears you may have other debts as well, and you may not be getting all the income youre entitled to, such as benefits. After that there is a process of helping people work out what they can afford to pay, and putting together a budget based on that.
Get back on track
There are a number of solutions. The lender may agree to accept lower payments for an agreed amount of time, or may extend the term of the loan to give lower monthly repayments. Borrowers on a capital and interest mortgage may be able to switch their payments to interest only for a short time to reduce payments. If the situation cannot be resolved, another option is to sell the property and trade down to a cheaper one.
Government support for those in difficulty with their mortgages has gradually reduced over the last 20 years. To qualify for income support, the borrower must have no more than £8,000 in savings, also only the first £100,000 of a loan qualifies for income support. Borrowers do have the option of taking out mortgage payment protection insurance (MPPI) which will pay your monthly mortgage payments if you are made redundant or unable to work. Again, advice should be sought, ideally from an independent financial adviser, on the best policy. Even if you have this cover, the insurance payments may not start straight away, so contact your insurer as soon as possible.
The CAB recently called for an investigation into payment protection insurance, arguing that many products, ranging from mortgage protection to policies protecting credit card payments or other loans, are often very expensive. Tutton says: Its important that people understand the product and know exactly what it offers. PPI can be a good product, but it could be better than it is. One concern is that policyholders often have to wait for their money, which can put them into arrears.
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