If you find yourself with mortgage arrears it is really important to speak to your lender as soon as possible. Ignoring the situation is the worse thing you can do. Joanne Atkin explains what options homeowners can consider
Since the global financial crisis began in 2008, mortgage lenders have been practicing what is known as ‘forbearance’. This means they will look at what they can do to help you stay in your home. Missed payments mean lenders can repossess your home – but that is the last thing they want to do as they will lose out financially.
The Pre-Action Protocol was introduced in November 2008 to ensure that lenders and borrowers act fairly and reasonably with each other to resolve any matters concerning mortgage arrears.
Before any court action is taken to repossess a property lenders must show they have worked with borrowers to try to come to some mutually agreeable arrangement; but equally borrowers must make an effort to pay – there is a difference between “can’t pays” and “won’t pays” and lenders can spot them.
If you are aware that you will be unable to make all your payments, it is advisable to inform your lender before you actually get into arrears. Most lenders charge a fee if you are late or miss a payment but once you have an agreement in place with your lender you will not be charged a monthly arrears fee.
Lender forbearance
There are a number of options your lender may consider and this will depend on your circumstances. But remember, mortgage forbearance is only a short-term solution. In the long run the arrears will have to be paid or your home will be repossessed.
One of the most common ways to help a borrower through a difficult financial period is to lengthen the mortgage term. For example, if you have 20 years left to pay on your mortgage, this could be extended to, say, 25 years. This means that your monthly repayments will be lower as the cost is spread out over a longer term. The downside is that it will make the overall cost of the mortgage higher.
Another option that some lenders may allow is to reduce the monthly payments for a few months then when you are back on your feet, increase the monthly payments until the accrued arrears have been paid off.
Some lenders may even allow you to take a payment holiday but this is often only if you have overpaid in the past.
If you are on a capital and repayment mortgage you may be allowed to switch to an interest-only mortgage. However, if you do this you will only be paying the interest and you will still owe money on the cost of the house. This is an area of lending that many lenders have either pulled out of or they insist you must have at least 50 per cent equity in your property. For example, if your house is worth £200,000, the amount left to pay on your mortgage must be no more than £100,000.
Each lender has its own arrears policy and should explain to you what it is.
Debt advice
You should also seek advice from a debt counsellor. There are a number of free debt agencies you can use without having to resort to debt advisers that charge you fees. Debt advisers will go through all your financial income and outgoings, which can be particularly helpful if you have other debts as well as your mortgage. They can also advise you of any government schemes or benefits you might be entitled to.
MPPI
If you have Mortgage Payment Protection Insurance (MPPI) this will pay your monthly mortgage payments, usually for up to 12 months, in the event of accident, sickness or unemployment. However, it is a good idea to make sure you have two months worth of mortgage payments saved up because if you make a claim there is often an excess period of up to 60 days before the policy will pay out. As with any type of insurance you should always check out what the policy does and doesn’t include before you buy it.
Support for Mortgage Interest
For homeowners on benefits, you may be entitled to income Support for Mortgage Interest (SMI). People claiming the following benefits – income support, income based job seeker’s allowance, income related employment allowance and pension credit – could be eligible but there are limitations.
The maximum mortgage size is £200,000, or £100,000 for those on pension credit, and any savings you have must not exceed £16,000. If you work 16 hours or more a week, or your partner works 24 hours or more, you cannot claim. The maximum payout for people claiming job seeker’s allowance is two years but there is no cap for the three other types of benefit.
After the initial claim you will have to wait 13 weeks before any money is paid. It usually goes straight to your lender and is paid four weeks in arrears. SMI only pays some of the mortgage interest and does not cover any of the capital. Currently, the standard rate at which SMI is paid is 3.63 per cent, which is based on the Bank of England average mortgage rate. This rate will change if the Bank of England’s average mortgage rate changes by 0.5 per cent.
If you return to work, earn more money or work more hours you can still get help for a further four weeks through Mortgage Interest Run On; but this is paid to you and not the lender. Other stipulations are that you must have been claiming the benefit continuously for at least 26 weeks and you expect the work, or increased money, to last for at least five weeks.
Mortgage Rescue
Following the economic downturn and subsequent rise in people experiencing mortgage arrears the government set up the Mortgage Rescue scheme, which is operated independently in England, Scotland and Wales. It is aimed at vulnerable households facing repossession, which includes families with children, the elderly, those with a disability or pregnant women. There are two options:
• Shared Equity is where a housing association buys a stake of the equity in your property. This reduces your monthly mortgage payments but you still remain the outright owner of the property.
• Mortgage to Rent is where a housing association pays off your mortgage debt and you then become a tenant of the housing association paying rent but you no longer own the property.
Repossessions
If it boils down to the inevitable and you have no choice but to head down the repossession route, you will probably get more money if you can sell the property yourself rather than leave it to the lender.
Lenders will want to get rid of the property quickly and recoup their money. If the property is sold for less that you owe on the mortgage – often due to negative equity – you are still liable to pay the shortfall to the lender who can pursue you for 12 years.
Since the start of the credit crunch five years ago, mortgage lenders have sold repossessed properties at an average discount of 23 per cent compared with 13 per cent prior to 2008, according to analysis by the credit ratings agency Fitch Ratings.
The time lenders take to sell possessed properties over the same period has decreased, implying that lenders are willing to sacrifice on price in order to achieve a quicker sale. Before 2008, a third (34 per cent) of repossession cases suffered losses, but this has now increased to 87 per cent, implying that most of these loans were taken out at the peak of the market and at higher loan-to-value ratios.
Assisted Voluntary Sale
Some lenders will help you to sell your property; this option is called Assisted Voluntary Sale (AVS).
Peter Gammon, director of asset management at property firm Move with Us, says: “The beauty of AVS is its simplicity. As an alternative to court proceedings, lenders provide support and assistance to the borrower in marketing their property by managing the sales process on their behalf. The aim is to obtain the best price possible in the shortest timescales, minimising the debt situation for both parties and ensuring a sensible conclusion to the mortgage term.”
There is even a lender who will invest in properties to make them more saleable. Bath Building Society has actually project managed works at properties on behalf of borrowers, at minimal charge, to enable progress to be made. In other instances the society has encouraged letting to supplement income, where appropriate, although many lenders will not allow this.
Dick Jenkins, chief executive at Bath Building Society, comments: “My experience is that behind every serious arrears problem is some sort of human crisis and lenders have the capacity to add to the crisis or be part of the solution.”
He gives an example: “We have a borrower whose business failed and was made bankrupt. Over the course of several months he racked up arrears and then decided he was going to sell his house in the Midlands, which was mortgaged to another lender and go and live in his substantial holiday let house, which was mortgaged to us in Devon.
“We developed a strategy whereby he lived in part of the holiday let, and part was converted into two flats; the costs of the conversion being lent by the society. The flats were then let out on assured shorthold tenancies, thus generating sufficient income to pay both the original mortgage and the further advance. Over the course of three years, the borrower is now out of arrears. A standard repossession approach would probably have seen us taking a loss of £30,000 to £50,000.”
So there are options, and some lenders will be more ‘helpful’ than others but they should all at least consider ways to help you – either with the arrears or, as a last resort, the repossession.
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