Banks tell 'at risk' borrowers to spend less or lose their homes
Mortgage payments should be top priority for customers, say lenders
Sunday 04 September 2011
State-owned banks are warning families to curb their spending and concentrate on their mortgage payments.
The banks are identifying risky customers in a pilot scheme that will see 30,000 customers called up over the next few months.
Struggling Bradford & Bingley and Northern Rock customers will receive a phone call from bank staff at UK Asset Resolution (UKAR) urging them to cut back or risk losing their homes when interest rates rise from their current low of 0.5 per cent. UKAR is the holding company overseeing 750,000 mortgage customers and £48bn in lending from the two banks that were nationalised during the credit crisis.
"We're running a pilot involving 2,000 customers a week," says Nigel Charlesworth, a spokesman for UKAR. "We're calling them because they may be people who are going through some financial difficulties, who we have identified because they perhaps missed a payment or cancelled a direct debit."
Some taxpayers may be pleased to learn that nationalised banks are taking steps to protect our interests. Mortgages may be secured against the properties – which could be sold to cover the debt – but this assumes there is sufficient equity left and high-risk borrowers are likely to be those with high loan-to-value mortgages, who pose a considerable risk to UKAR.
It may well be a sensible move to intervene, but what can these customers expect to hear at the other end of the line? And is it really the place of any institution to tell you how to spend your money, particularly one that has been bailed out by taxpayers?
The line from UKAR is that it is planning to offer support to anyone who may be struggling to pay their mortgage and to ask if there is anything the bank needs to know about the individual's financial situation. The company has said that customers may be offered free, independent debt advice and will be advised to focus on their most important debt, the mortgage, instead of Sky subscriptions, going out or the latest mobile technology.
In addition to missed payments and changes in habits such as direct debit payments, how else are these so-called high-risk customers being identified?
"We also have information that comes via alerts from various agencies – there's nothing unusual in that – and that might suggest that someone may be having some problems," says Mr Charlesworth.
Regarding data protection, it may raise some concerns that banks are accessing credit information midway into a mortgage. When you apply for credit, it is accepted that the lender will first obtain your consent to check your credit report to help with the initial assessment, but this will also typically mean it can make future checks to assist "ongoing account management".
"They also notify you that if the account is opened they will share information about your account with credit reference agencies and tell you how to get a copy of your credit report," says James Jones from credit reference agency Experian. "This permission is based on a different part of the Data Protection Act and does not involve the matter of 'consent' as it is deemed to be necessary for the lender to operate their service."
Ongoing account management checks are in no way secret and lenders cannot carry out any sort of credit check without your prior permission. The good news is that these do not leave any footprints that can affect your credit scoring. There is absolutely no impact on your credit history but it could alert your bank to any potential problems.
"As well as monitoring for specific events, such as a missed payment, credit risk scores can be calculated (using credit report data) on a regular basis and, depending on the lender's policies, can trigger alerts when perceived risk reaches a certain level," says Mr Jones.
Despite the slightly concerning Big Brother element to all this, experts say this is fundamentally a good thing. If vulnerable borrowers are being offered help and advice from their lender, it is in the interest of responsible lending. Monitoring customers' borrowing situations and offering assistance or referring someone to the free debt advice sector is surely helpful to everyone involved, but on the proviso that customers are not being compelled to make specific changes.
"Lenders are often accused of being reactive, rather than proactive. The impetus is usually on customers to contact their lender if they are in trouble. It is common sense for people to be told to prioritise their mortgage, but it must be done in the right way," says James Cotton from mortgage broker London & Country.
While it may be a positive step to see banks trying to help customers at the earliest sign of trouble, rather than when it is too late, the onus is still firmly on the borrower's shoulders to keep on top of their debt, particularly with public sector cuts on the way and the threat of interest rates rising.
Figures from the National Institute for Economic and Social Research show that raising rates by just half a percentage point would cost households £3bn.
"We haven't heard from any of these customers in relation to the pilot yet, but I would welcome them referring anyone found to be needing debt advice as we provide free mortgage counselling as well as general debt advice," says Una Farrell from debt charity Consumer Credit Counselling Service (CCCS). She adds that as long as it remains a free service for customers, this is a positive move on behalf of UKAR.
"Recent analysis of CCCS data found that that an increase in mortgage costs as a result of an interest rate rise would badly affect the most financially vulnerable households, so they need to be prepared for a rate rise as it will come sooner or later."
The most important tip if you're struggling to pay your mortgage is to act quickly. Any lender will expect you to tell them why you have missed payments and to arrange repayment of the arrears. Producing a household budget is the next step, listing all of your income and expenditure, minus any unsecured debt such as credit cards and unsecured personal loans.
The consequence of not paying your mortgage could be losing your home so this should be the focus. Any money over will show how much you can put towards your mortgage arrears; it may well be that some of life's luxuries, be it a premium TV package or the latest snazzy phone, will have to go.
James Cotton, London & Country Mortgages
"The banks need to be trying to help people without putting pressure on them to make certain financial choices. Ultimately customers must make those decisions themselves and you can't have them feeling that they are getting bullied or told what to do when they've kept up with all their obligations."
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