A total of 36,300 UK properties were repossessed last year according to the Council of Mortgage Lenders. They forecast that this will rise to at least 40,000 during 2011. Experts believe this number could climb much higher if the Bank of England starts to increase the interest rate this year. Despite this, the level of repossessions is not as bad as was feared at the beginning of the recession due to three important factors:
The record low base rate - although likely to rise soon, the Bank of England have maintained this for an extended period making tracker mortgages very affordable. Mortgage Payment Protection Insurance either bought direct on-line or from mortgage providers, paid out record levels of claims for victims of redundancy. Government initiatives to influence and encourage mortgage providers to find ways of allowing people in arrears to remain in their homes. Direct intervention through the benefits system targeting people with short term income issues and the vulnerable.
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Anyone concerned about what could happen if unemployment or illness prevented them from working and paying their mortgage should know the answers to these questions:
1. How much should someone have in savings in case they lose their job?
Following redundancy, the average person is out of work for six to eight months. If living in an existing area of high unemployment, it might be more appropriate to think in terms of potentially 12 months. Having savings equivalent to take home pay for this period should be considered the minimum safety margin.
2. No savings?
Consider the low cost option of buying Mortgage Payment Protection Insurance. The best deals are on line and price checking on the big Price Comparison websites, or consumer websites such as Money Saving Expert are a great place to start. However, some people do not qualify, or leave it too late to buy, or simply can't afford the typical 40 per month premium.
3. Already out of work and struggling to pay a home loan?
Contact the lender right away. The major providers have to handle borrowers in this position "sympathetically and favourably". People they consider to only have short-term problems may be allowed a 'repayment holiday' although the missed payments are added to the arrears to the home loan
4. Is switching to an interest-only mortgage and option?
This will only reduce the monthly repayments, however the reduction may be enough to stop a monthly budget and other debts spiralling out of control.
5. Increase the mortgage term instead?
By increasing the mortgage time period (more viable for a younger person), has the immediate effect of reducing monthly repayments. However, the extra interest this adds to the total debt can be quite frightening.
6. Need advice?
Many of the larger mortgage providers have telephone helplines and a debt guidance process. They are certainly the best first step rather than asking the cashier at a local branch.
7. Is there independent advice available?
The best known are Citizens Advice, the Consumer Credit Counselling Service and the National Debtline. These are particularly useful following contact with the mortgage lender as they will also assist regarding other debts including speaking to those lenders on behalf of the person in financial difficulties
8. Will the Government help pay a mortgage?
There is a means tested benefit designed for people with only temporary issues eg where one of two wage earners are out of work; Support for Mortgage Interest, pays the interest on a mortgage up to 200,000 after 13 weeks for up to 2 years. However receiving this benefit is linked to the qualification for other benefits and somewhat complex. It is considered by the Government as a benefit of last resort where the claimant has exhausted all other avenues with their lender and is threatened with repossession. It does not cover arrears, insurance policies or pay off any of the capital sum. Without other money to meet the usual bills, despite qualifying for this benefit, homes of the financially vulnerable are still likely to be repossessed.
9. Massive negative equity; why not just hand back the keys?
This is a really bad idea. Interest will continue to build up on the debt until the property is sold, because this takes some time, repossessed properties are frequently auctioned or sold off cheap. If the sale does not cover the debt, potentially the person who handed back the keys could still be sued for the balance.
10. Sale and lease/rent back seems an attractive option?
There are some unscrupulous companies and many instances of sharp practice that anyone considering this should precede with utmost caution. Many are lured by the attraction of their debts being wiped out overnight and still being able to live in their 'own home' just paying to lease or rent. These companies often pay just a fraction of the true value of the property and lease agreements can be as short as 12 months. Tenancy agreements usually last 6 to 12 months. Thereafter the lease payments or rent can rise. Should the tenant fail to pay they can be evicted. Worse still, the family home the person thought they had secured can then be sold by the company on the open market at a substantial profit and the tenant walks away with nothing.
11. Are vulnerable people given extra help through the State Benefits?
There is the Home Loan Rescue Plan run by the Local Authority and part of their social housing provision. They arrange an assessment of the property and then consider either a 'shared equity loan' or a 'Government mortgage to rent' scheme, depending on the claimants circumstances. The council will involve a Registered Social Landlord (RSL) or an independent housing organisation registered with the Tenant Services Authority. However it must be understood that the home owner will lose part or all of the equity in their home.
12. What should he average family do?
Reliance upon the State in these circumstances is not really an option for the average family as they would have to be in truly irreconcilable financial difficulties to qualify. Benefits are far from generous and other debts, not covered by these mortgage specific schemes, can still result in repossession. For example, people with serious debts in the past may have gone down the route of debt consolidation. They will have guaranteed payment of their consolidated loan against the equity in their home. The benefits system does not treat consolidated loans as mortgages and these finance companies come still repossess a home if their customer's payments are not kept up.
There is a strong case for any family lacking enough savings to fall back on if the main wage earner cannot work, to immediately apply for Mortgage Payment Protection Insurance. Critically, it can only be bought when the applicant is in steady work and their firm has not announced any redundancies. Provided they qualify. Paying monthly premium that is less than the price of a tank of fuel for their family car, which makes this cover very affordable.
Most people choose a benefit of around 1,000 per month. It is paid to them if they are unable to work due to accident, sickness or unemployment. Anyone without a mortgage to pay, or wants to top up the benefits they already have under an existing Mortgage Payment Protection policy, should look for Short Term Income Protection Insurance. On-line specialist providers offer the best value for money and the UK Governments CFEB (previously FSA) consumer website the Money Advice Service strongly encourages purchasers to shop around on-line for the best deals.
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