Ways to Avoid Repossession

Thursday 12 March 2009

The financial crisis consequences, such as growing unemployment, cause a lot of families to fear redundancy, arrears, and repossession of houses. Although many people believe that social security benefits will help avoid these difficulties, the reality is that very few will be able to benefit from governmental help programs. Many lenders hope that the Homeowner Mortgage Support Scheme (HMSS), a voluntary scheme with the lenders, which allows borrowers to postpone mortgage interest payments for up to 2 years, will be available. However, it turns out that very few will be eligible for it. The Council of Mortgage Lenders (CML) has estimated that 145,000 families could lose their homes this year and that 245,000 could face court actions. Currently, there are 3 schemes that help avoid repossession. Those are: the Support for Mortgage Interest (SMI) scheme; the Mortgage Rescue Scheme; and the proposed HMSS. The SMI scheme pays mortgage interest (not capital repayments!) on a loan of up to £200,000 if the borrower has been unemployed for more than 13 weeks. The problem with the scheme is that it usually takes two incomes to afford a mortgage, and therefore, two people must lose their jobs to qualify for SMI. Also, a family must not have more than £16.000 savings to qualify. This means, that in fact only single home-owners with no or little savings will be eligible for SMI. As for HMSS, which is due to come into effect in April, the scheme allows to postpone interest payments for up to 2 years. The unpaid interest is supposed to be rolled up, added to the loan, and is to be repaid once the borrower gets a new job. However, HMSS is voluntary and no lender can be obliged to go with it. Also, the very idea of rolling up the interest seems strange, because not only will it not help an unemployed borrower, but it will also increase his/her debt. Given all the above, it is clear that most governmental protection schemes will not work for the majority of borrowers. That is why brokers suggest that borrowers always buy some kind of insurance for their mortgage, which will protect them against sickness or unemployment. Some types of insurance are relatively cheap and cost around £40 for a £200,000 mortgage at 5% with monthly payments of around £1,000.