More and more people are feeling the pressure as bills mount up and they fall behind with their mortgage repayments. Often they do not face up to the situation until they are taken to court. And sadly, in about 20 per cent of cases the Consumer Credit Counselling Service (CCCS) advise on, they have to tell people that they will lose their home.
Some mortgage lenders, facing the new reality of tighter personal finances and falling house prices, are now giving borrowers in financial difficulties a more sympathetic hearing. Attitudes seem to have changed from a couple of years ago. Lenders now know that, in the current market, they get much less for a repossessed property sold at auction so they are more inclined to search for other solutions.
But lenders, and particularly those in the sub-prime market – are still expecting too much of families in debt difficulty. They are consistently applying pressure and loading late payment penalty charges. This simply makes a bad situation worse.
So it's easy to see how the old maxim "desperate times call for desperate measures" appeals to some borrowers. However, some of the desperate solutions offered to those in arrears can often backfire. In particular, the media is increasingly rounding on organisers of sale and rent-back schemes and individual voluntary arrangements (IVAs).
In the last few years, increasing numbers of people have taken out an IVA – it’s a type of insolvency arrangement where the debtor agrees with his creditors to repay an agreed percentage of his debts over a set number of years. Sometimes, up to 75 per cent of the debt ends up having to be written off. However, IVAs are highly controversial. That’s because the insolvency firms acting as the go between often charge high fees and levy penalties for any missed repayments.
Spokespersons from the debt charity and banking sectors have also accused IVA organisers of in effectively mis-selling IVA’s by persuading people to sign up with them when other solutions may been a better option.
All in all, IVA’s are not a "magic bullet" solution. If you can't maintain your mortgage repayments an IVA won't help. Your lender has a first secured charge on your property and an IVA will not get you out of that. You should be able to reduce your other payments through an IVA so that you can service your mortgage, but in reality it is unlikely to work quite like that.
Even bigger problems can emerge for people tempted by sale and rent-back arrangements. Sale and rent-back schemes promise to pay a proportion of your property’s market value, often around 70 per cent, providing cash to repay the mortgage. At the same time, the ex-homeowner is given the opportunity to stay in the property as a tenant for at least 12 months. But the problem is that this sector of the market is completely unregulated and there are some unscrupulous dealers around.
For example, sellers are offered around 70 per cent of the purchaser's own valuation of the property. What is there to stop the valuation being well under the true market rate? In addition, some sale and rent back schemes only offer a 12-month rental agreement after which they can throw the tenant out. The reputable companies offer 10 year tenancies and use independent valuers.
So if you are in arrears what do you do? The truth is you are in for a long slog. Here are some tips: Firstly examine your income – are there any tax credits or state benefits or you're not claiming? If you have a spare bedroom, rent it out. That income should be tax free. Then draw up a list of all your expenditure and make a budget. You can then show this to your lenders and, as a last resort, you may ask them to reduce your payments by extending your mortgage term. But be aware that this will mean that over the years more interest will be paid. As an alternative ask for a repayment holiday. This is a temporary suspension of your repayments which is designed to provide some breathing space to enable you to sort out your finances.
But remember, the decision to grant a repayment holiday is solely at the lender's discretion. Unfortunately, no matter how proactive you might be, you are at the mercy of their lender. Lenders do take markedly differing views. Some expect arrears to be repaid – as well as the normal monthly repayments kept up – within 12 months. Others will allow longer.
And be aware that some lenders are quicker to go for the nuclear option. We have heard of cases where people been in arrears for a relatively short period and yet repossession proceedings have started. But as a guide line about three months is when lenders get very pushy. Lenders that do rush for repossession are likely to get short shift in the Courts, but only if the borrower takes appropriate action. Courts instinctively want people to remain in their homes and don't take too kindly to lenders who want to repossess after just a month or two of arrears. Bearing in mind the seriousness of their situation, it is surprising that fewer than half of people who face repossession turn up for the court hearing. Of those that do turn up, around 85 per cent of people are allowed to remain in their homes.
Michael Challiner is the editor for Brokers Online, one of the UK’s largest finance sites. Visit Brokers Online to find out more about
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