Although it is not expecting a great fall in house prices, the Royal Institution of Chartered Surveyors (RICS) is already predicting home repossessions will rise from 30,000 to 45,000 – an average of 123 repossessions per day – in 2008.
Although nowhere near the historic high of 80,000-plus in 1990, RICS’ predictions, made at the end of last month, are further evidence of the credit crunch’s impact on family finances.
The growth in non-conforming lending has also been blamed for a rise in repossessions. Citizens Advice, which dealt with over 57,000 problems about mortgage and secured loan arrears, claims that last year non-conforming lenders were responsible for a level of possession actions substantially above their market share – in some cases the equivalent of 10 times more than mainstream mortgage and secured loan lenders.
The last to know
Preventing repossession is not the traditional or expected role of a mortgage adviser – in fact advisers are normally the last to know when a borrower is having problems paying their home loan.
The problem for many brokers is that by the time a client defaults on a mortgage repayment, their financial situation has hit rock bottom.
Peter O'Donovan, mortgage adviser at London-based Bestinvest, says: “Often people will continue to pay their mortgage through thick and thin, at the expense of everything else. The family home tends to be the most important financial priority. Quite often some borrowers will even use their credit cards to make sure the mortgage payment goes through.”
He adds: “Banks will make every attempt to put a mortgage direct debit through, as they know how important it is. Of course, the borrower is incurring huge fees and charges to do this.”
Mortgage regulation has put more of an onus on advisers to maintain contact with a client, as have the principles of ‘Treating Customers Fairly’. In the past it tended to be that once the mortgage was sold, that was the end of the adviser client relationship.
O’Donovan says this is no longer the case. “Now we contact clients on a regular basis, at least once every two years, to take account of any changes in circumstances.”
However that contact tends to be limited to key points, such as the expiration of a fixed rate mortgage deal.
O’Donovan admits encouraging clients to get in touch if they are having problems is an uphill struggle. “Admitting you can’t pay your mortgage to someone you know is hard enough, let alone admitting it to an adviser.”
When a client is given a mortgage offer, they are made aware of the importance of keeping up their repayments as well as letting the lender know immediately should their circumstances change.
Even so, it may only be clients who you know really well that will contact you if they are having problems, says O’Donovan.
Dealing with payment shock
Lisa Taylor, mortgage expert at Moneyfacts, says advisers who sell non-conforming and self-certification mortgages need to be particularly vigilant as these are the types of mortgages where the borrower is more likely to experience problems.
Other clients who may find themselves at risk of default include those whose two-year fixed rate deal is about to expire.
Between the Summer of 2005 and Spring of 2006 an estimated 1.3 million borrowers took advantage of historically low rates, such as those offered by Halifax, which at one point had a two-year fixed offering with an annual percentage rate of 4.29 per cent.
A borrower with a £100,000 mortgage who fixed their loan on that interest rate would be making a monthly repayment of £544 per month. Fast-forward two years later and the cheapest two-year fix available is 5.49 per cent – a repayment of £613 per month.
Taylor says that these borrowers could find themselves paying £200 or more extra a month if they do nothing; for example, someone who fixed their mortgage on the Halifax rate would automatically pay the lender’s standard variable rate of 7.50 per cent.
First sign of trouble
Katie Tucker, technical manager at John Charcol, says borrowers also need to be made aware from the start that getting in touch with their mortgage broker at the first sign of a financial squeeze is imperative.
After all, until a house is sold, the borrower is liable to pay the mortgage. If a client’s home sells for less than they owe, their mortgage won’t be fully repaid and they will have to pay the balance. The mortgage lender can start chasing them for this at any time up to six years after the sale.
Tucker says many borrowers don’t realise that there are plenty of things advisers can do, once the client gets in touch.
She points out that under MCOB rules, lenders are under an obligation to do all they can to help a borrower keep their home.
She says: “In most circumstances borrowers have the right to switch from a repayment to an interest only loan.”
There are also other measures such as extending the term of the mortgage, or by having a repayment break.
If a mortgage is linked to an endowment policy and the borrower can’t afford both sets of payments – the interest payments on the loan and the payments towards the endowment policy – the adviser can ask the endowment policy company for a repayment holiday, although they will have to arrange with the borrower how to make up the backlog of payments once the policy is restarted.
Warding off financial problems
One of the most important things an adviser can do to help a client whose home is likely to be repossessed is to check their insurance cover.
Taylor says: “Borrowers may have insurance such as income protection or even some very basic cover that can be used to tide them over.”
Taylor points out that every little may help. Even just having a loan or credit card covered by payment protection insurance could free up some cash the borrower would be able to use elsewhere – such as paying off the mortgage.
Other financial help may include state benefits. Even so, these extra benefits will only help to pay the interest part of a loan, and they are paid at a rate set by the government.
If a borrower is 60 years old or over, they could also be entitled to Pension Credit and may get an extra amount to cover mortgage interest payments.
Some mortgage intermediaries believe helping clients make a budget is a useful but underrated service that may help them free up money and keep making repayments
Taylor says: “It may be that it is possible for borrowers to cut down on unnecessary household expenses, such as gym memberships that don’t get used.”
But Tucker points out that these measures are very much temporary solutions to temporary problems.
“In most cases people have got into trouble because they are experiencing a change in circumstances, a job loss or illness.”
Taylor points out that lenders are less understanding in circumstances where a borrower appears to have over-extended themselves.
“Someone who is having problems juggling a huge credit card bill with mortgage payments may be considered by a lender to have been neglectful. However, most people who have problems with repaying the mortgage tend to be those who have had a change of circumstance.”
Easing the situation
The good news is that borrowers can look forward to an easing of rate this year.
The World Central Banks’ cash injection into the money markets in December meant the rate at which banks borrow from each other – the three-month LIBOR – has now dropped under the 6 per cent mark, from 6.65 per cent to 5.89 per cent.
Tucker expects the Bank of England Base Rate to drop too, and soon. She points out that the last Base Rate cut was voted for unanimously by the Monetary Policy Committee, and two-year swap rates are down to 5.24 per cent.
RICS is also optimistic. Simon Rubinsohn, chief economist at RICS, believes that if labour market conditions remain generally firm, the predicted easing of property prices could mean that first-time buyers start to return to the housing market.
But for some mortgage borrowers, that may be too late.
David Holmes, corporate affairs manager at Yorkshire Building Society, says many borrowers are also on annually reviewable repayments. This means their monthly repayments are set for a period of 12 months. If rates have gone up during that period they could find their monthly repayment has increased substantially.
He says: “It does, of course, work the other way around. If rates go down then they could find their accounts in credit.”
For these borrowers and anyone else who finds themselves in financial difficulty, there is only one option, says Holmes.
“Anyone who is in the early stages of repayment difficultly should get in touch with their lender as soon as possible.”
He says most mainstream lenders will do all they can to help.
“After all it costs money for a lender repossess a property. It involves court costs as well as a potential fall in the value of the property. It is in lenders’ interests to make sure they do all they can to help the borrower continue to live in their home.”
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