Don't bite the 'magic bullet': beware of quick fixes if you fall behind on your mortgage
More and more households are hitting trouble with their debts, says Julian Knight, but there are better solutions than IVAs or sale and rent-back
Sunday 08 June 2008
'People feel the bills mounting up and then they are falling behind with their mortgage. Often they do not face up to it until they are being taken to court. Sadly in about one in five cases we advise on, we have to tell people they will lose their home."
These are the words of Frances Walker at debt charity the Consumer Credit Counselling Service (CCCS), which recently launched a helpline for people in mortgage trouble (0800 138 1111) as the rising cost of living drains their resources. Likewise, the National Debtline charity reports a 23 per cent rise over the past year in the number of people coming to it citing mortgage arrears.
Paul Mullins, chief executive at National Debtline, says some lenders, facing the new reality of falling house prices and tighter personal finances, are now giving people in mortgage difficulties a more sympathetic hearing: "Attitudes have changed from a couple of years ago. The lenders know that, in the current market, they won't get much for a property repossessed and then sold at auction."
But Ms Walker says that lenders – particularly in the sub-prime market – are still expecting too much of those in debt difficulty, applying pressure and loading late- payment penalty charges.
Under these circumstances, it's easy to see how the old maxim "desperate times call for desperate measures" might appeal to some borrowers. However, some of the radical solutions available to people in arrears can often backfire. In particular, critics have rounded on providers of individual voluntary arrangements (IVAs) and sale and rent-back schemes.
In recent years, more and more people have taken out an IVA – a type of insol-vency where the debtor agrees with his creditors to repay a certain percentage of his borrowings over a set period. Sometimes, up to 75 per cent of the debt can be written off. However, IVAs are highly controversial because the firms that act as go-between often charge hefty fees and impose penalties for missed repayments. Some in the banking and debt charity sectors have also accused IVA providers of in effect mis-selling the products, persuading people to sign up when other options may be better.
All in all, says Mr Mullins, this is not a "magic bullet" solution. "If you can't pay your mortgage, an IVA won't help. Your lender has a secured charge against your property which an IVA can't get you out of. You may be able to reduce your outgoings through an IVA so you can better concentrate on the mortgage, but in reality it is unlikely to work like that."
Even greater problems can arise for those tempted by sale and rent-back. These schemes promise to pay a proportion of a home's value, normally around 70 per cent, so quick cash is obtained to pay off the mortgage company. At the same time, the seller is offered the chance to remain in the property as a tenant for at least 12 months. But Ms Walker says the CCCS does not recommend sale and rent-back to as it is "completely unregulated".
Even those in the industry acknowledge there are big pitfalls. "For starters, sellers are offered around 70 per cent of what is, in effect, the purchaser's own valuation of the property," says Dougie Lister, chief executive of sale and rent-back firm the UK Housing Alliance. "What's to stop the valuation being under the odds. In addition, most only offer a 12-month agreement, at the end of which they can chuck the tenant out." He adds that his firm offers 10- year tenancies and uses independent valuers.
So what can people in arrears do? The truth is that this is a long slog, and Mr Mullins offers the following tips: "First look at your income – are there any benefits or tax credits you're not claiming? If you have a spare room, rent it out. Then draw up an expenditure budget; you can show this to your lender and, as a last resort, you may want to ask it to extend your mortgage term." However, this will mean more interest will have to be paid. An alternative is to ask for a payment holiday. "This is a temporary halt designed to give the borrower some breathing space to sort out their finances," adds Mr Mullins. But it's completely at the lender's discretion whether they grant a holiday or not."
Unfortunately, no matter how proactive borrowers are, they are at the mercy of their lender. "Attitudes vary markedly," says Ms Walker. Some lenders expect arrears to be paid back – as well as the normal monthly repayments kept up – within a year. Others will allow longer."
And some lenders, she adds, are quicker than others to go for the nuclear option. "We hear of cases where people have only been in arrears for a short period and repossession proceedings are started. But as a rule, around three months is when lenders get very serious."
According to Mr Mullins, lenders that do rush for repossession are likely to get short shift, but only if the borrower acts. "Courts want people to stay in their homes and don't look kindly on lenders that want to repossess after a month or two of arrears. The problem is that fewer than half of people who face repossession turn up for the hearing. The courts allow 85 per cent of people who do turn up to remain in their homes."
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