Q. What is the level of arrears and repossessions in the UK?
The latest figures from the Council of Mortgage Lenders (CML) show that during 2001, the number of properties taken into possession by mortgage lenders fell by about 20%. This is equivalent to one in 625 mortgages leading to repossession. In the early 1990s, the figure was as high as one in 130 mortgages.
Similarly, the number of mortgages in arrears also fell during 2001 by nearly 13%, and less than 1% of all loans have three to six months’ payments in arrears.
Q. How long does an arrears record affect an individual’s credit record ‘ does it depend on the severity or the amount?
Arrears will have an immediate effect on an individual’s credit record and their ability to secure a mortgage through a prime lender. This is where sub-prime or non-conforming lenders serve the market for individuals who may have had an arrears problem in the past.
The length of time an individual’s credit record is affected by arrears is dependent on the severity of the problem.
Generally, repossessions stay on an individual’s credit record for up to five to six years and arrears will be taken into account for about 12 months after the problem has been resolved. However, this again can vary depending on how serious the problem was and how many months’ arrears the individual accrued.
Q. What advice should brokers give borrowers who are facing potential arrears problems?
The single most important piece of advice for individuals in this situation is to talk to their lender. Unfortunately, many borrowers tend to bury their head in the sand and believe the problem will sort itself out, but this just makes the situation worse. The sooner a borrower can begin discussions with their lender, the sooner a solution can be reached.
The last thing a lender wants to do is repossess a property. It is not in their interest financially due to the complexities of repossessing the property and then having to sell it on the open market for the best possible price.
Q. What is the current position on the take-up of mortgage protection payment insurance (MPPI)?
While the causes of financial problems may not be preventable, borrowers can protect themselves with MPPI to ensure mortgage payments are covered.
Take-up of MPPI is increasing and a total of 22.5% of all mortgages in the UK are protected by insurance which covers individuals for the type of life-changing events that can lead to arrears and repossessions ‘ for example, loss of employment or sickness.
Unfortunately, many borrowers still believe the Government will help them with mortgage repayments should they lose their job. Following a change in law, a borrower is not eligible for State benefits until they have been out of work for nine months ‘ and, even then, support is limited to interest payments at a predetermined rate and certain criteria must be met. In fact, 70% of people who apply for State benefits do not qualify for them.
Q. What procedures are followed when a home is repossessed?
Repossession is a very detailed process for lenders to go through and, at the end of it, the borrower can still appeal against the final outcome.
The first step is for the lender to prove to the county court that they have done all they can to help the borrower get back on track with their mortgage, whether this is extending the term of the mortgage, changing the type of mortgage or deferring payment. It is then the decision of the court as to whether the process of repossession can begin.
If the lender is successful in court, they are then required by law to secure the best possible price for the property on the open market.
Lenders either deal with the sale through their own in-house estate agencies, or through a separate property management company.
At the end of this process, if the borrower is unhappy with the price obtained for their property, they do have the right to challenge the process.
Q. Can previous arrears on properties affect the credit record of the next individual to move into that property?
No, any arrears on a mortgage relating to a specific property rest with the individual who took out the mortgage and not the house. It is always a good idea for brokers to recommend to borrowers to check their credit records to ensure the information they have stored against their name is correct.
Q. Will a borrower have problems remortgaging if they have had arrears since taking out the first mortgage?
Arrears will affect a borrower’s ability to secure a remortgage deal with a prime lender. This is why there are specialist lenders who operate in the non-conforming market and offer mortgages to individuals who do not fit the standard high street profile.
Each borrower is assessed according to their circumstances and non-conforming lenders are able to handle the varying degrees of arrears and offer competitive rates and products reflecting the different credit risks of a borrower, depending on their history. Borrowers should realise that if their circumstances change significantly since taking out their current mortgage they may find it difficult to secure a similar deal.
Paul Thomas is chief operating officer at Mortgages plc