Under the Limitation Act 1980, lenders in England, Wales and Northern Ireland have 12 years to contact borrowers to begin the process of seeking repayment of a shortfall debt, however members of the Council of Mortgage Lenders agreed in February 2000, to reduce this period to six years. In Scotland, lenders can begin recovery action within five years.
Sara-Ann is concerned that homeowners may be lulled into a false sense of security with the Government’s recently-announced Homeowner Mortgage Support Scheme and concedes that whilst a two year mortgage payment moratorium relieves the financial pressure, temporarily, it only serves to build up more debt during the lifetime of the loan, which unfortunately for many could result in repossession and a greater fiscal crisis.
She comments: “People need to understand that if they break their mortgage payments, the outstanding debt and interest will accrue. If they take a two year payment holiday at the beginning of 2009, they will have to restructure their payments, taking into account the extra debt to pay at the end of 2011.
“Those unable to meet these increased costs may end up having to hand their properties back to their lender and with property prices now on a downward spiral, the price the lender sells at could be well below what is owed. As a result, borrowers could be chased for the equity shortfall until 2017.”
Lenders suggest that the average property price in the UK is now £163,000, some £31,000 less than 12 months ago, increasing the likelihood of a shortfall if a property is repossessed and subsequently sold.
Feedback from the CML suggests the period of time was chosen because by then, those with outstanding mortgage arrears, including; interest, repossession and sale costs, insurance and negative equity, should be on a firmer financial footing and more able to pay back what is owed.
“I’m not convinced people will be on a firmer financial footing,” counters Sara-Ann. “Those who resort to repossession could take years to build up their finances and during this time, they’ll have up to six years of worrying and waiting.
“I agree people need to take responsibility for their finances, but I question a process which allows debt to build and build, allows a property to be repossessed and subjects the borrower to a further six years of financial pressure. It’s like a form of mental torture.”
The CML predicts next year’s repossessions will top 75,000, well ahead of the estimated 45,000 at the end of this year, and the London School of Economics says the recession will be ‘deep and prolonged’ and is calling for 0% rates.
Sara-Ann concludes; “This is the tip of the iceberg – I suspect repossessions will be at their highest at the end of 2011 when borrowers come to the end of their two year moratorium. If only homeowners could divert a small percentage of their monthly income now into Payment Protection Insurance it would ensure their mortgage payments are met, in the event of unemployment, accident or sickness.
“Far better to have PPI that pays the full monthly mortgage amount for up to one year than rely on a two year mortgage payment holiday that builds up debt further and could result in repossession and a six year recovery period.”
