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11:46 AM, 16th February 2012, About 12 years ago 25
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I read with interest an article in the Daily Mail this week based on an announcement by Santander that they are radically over-hauling their policy on interest only mortgages. Now you can’t get an interest only mortgage from Santander unless you have 50% deposit to put down.
Business as usual, they can run things as they see fit.
For those of you that may not know, interest only mortgages (monthly payments of interest but no capital) have soared over the past few years as people gambled on property price increases covering the outstanding capital by the time the mortgage finished or as cheaper monthly mortgages underpinned by a known future pension or inheritance payout.
The recession raised cautious voices over interest only mortgages, with some banks refusing to grant new ones at all. In June 2011, the Financial Services Authority issued guidance to mortgage lenders that they should be very cautious before allowing people to convert their mortgages from standard repayment mortgages to interest only ones. They added that they need to look to future possibilities of payment before granting the switch.
Now here’s the rub. This article is not about buyers obtaining interest only mortgages from the off but the way that the contracts can be used to save people’s homes from repossession.
When I am not harassing landlords I am harassing banks in an attempt to save people’s homes. It’s a lengthy and sometimes mind-numbingly tedious procedure but at its root, the name of the game is to maximise people’s income whilst minimising their outgoings.
There are several ways to do this but the first port of call is to look to the type of mortgage and to see if the lender will convert to interest only, this will usually knock between £200- £400 a month off of the borrowers expenditure, sometimes even more.
If borrowers are on benefits, which is the usual reason for the mortgage arrears in the first place, and the mortgage was taken out for home purchase or essential repairs (not loan consolidation and a holiday) then they are usually entitled to receive a payment from the Department of Work and Pensions, known as ‘Support for Mortgage Interest’ – SMI.
This is paid for 2 years at a current rate of 3.68%. With many mortgage rates around the 4% mark, SMI will often cover most of the monthly mortgage payments if it is on an interest only basis.
The FSA’s guidance was a major – and very unhelpful – kick in the teeth for borrowers and people in my line of work who try to save their homes but to an extent I have found a certain degree of success by suggesting to lenders that they only convert to interest only for 6 months, after which time we will review the case and see if the borrower has regained employment. Some of the larger companies are ok about this.
It tends to be the larger lenders who are more reasonable and cooperative as opposed to the sub-prime, often second charge companies who behave like sharks in a feeding frenzy at the first sign of a missed mortgage payment.
Santander are one of the UKs largest mortgage lenders and I would estimate that about 15% of my clients are with them, which is what is so worrying about the latest announcement. Along with the 50% deposit rule they have also stated that anyone already on an interest only mortgage who has less than 25% equity or little savings may be forced to switch to repayment mortgages.
This, as can be seen above, would suddenly catapult the borrower already in financial dire straits into hundreds of pounds of extra monthly outgoings.
It doesn’t take too much of a stretch of the imagination to presume that in the light of their attitude to interest only accounts, asking them to convert a mortgage so that the borrower can obtain maximum SMI is going to be at best difficult but most probably impossible.
It is highly likely that many other lenders will follow Santander in some way.
Adjusting a policy on taking out interest only accounts is one thing, this was the basis of the Daily Mail’s article but the hidden aspect, which nobody has picked up on, is the devastating effect it will have on borrowers in difficulty.
Repossessions will be rising considerably in the coming year as a result.
I am not advocating that people change to interest only indefinitely. That can solve a person’s temporary difficulties but as the FSA point out it can set up massive problems for both borrower and bank in the future but in reality it isn’t what is usually needed.
Some people, the elderly or people with health problems and may not work again were never sensible candidates for interest only but the majority just need time to find employment again. The interest only/SMI equation has always been the perfect all round solution. The bank receives their payments and the borrower’s outgoings and income balance out enough for them to cope.
I will be keeping my own statistics on Santander cases over the coming months but it doesn’t look good.
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Ben Reeve-Lewis
12:41 PM, 16th February 2012, About 12 years ago
And not half an hour after this article going live Lloyds have just announced similar clampdown on interest only mortgages
Mark Alexander - Founder of Property118
12:56 PM, 16th February 2012, About 12 years ago
Reported here yesterday Ben, keep up mate!
http://www.property118.com/index.php/lloyds-tightens-interest-only-rules-for-landlords/24404/
Ben Reeve-Lewis
13:07 PM, 16th February 2012, About 12 years ago
I see......that'll be sarcasm then 🙂
Mark Alexander - Founder of Property118
13:55 PM, 16th February 2012, About 12 years ago
Oops! Sorry Ben, I meant to add a 😉 I'm sure you know my sense of humour now though.
14:13 PM, 16th February 2012, About 12 years ago
Don’t the lenders have to take all reasonable steps to help a borrower? (Or has reasonable just been redefined again!)
What I find most daft is, that if two people facing repossession swapped homes and rented to each other, then would they not in some cases both
get enough housing benefits to pay to rent to cover each other’s mortgages?
21:38 PM, 16th February 2012, About 12 years ago
This is why I have always advocated IO only mortgages but with the ability to pay the extra amount to make it a capital payment.
You then have flexibility of payment.
In bad times IO payments are only needed.
Good times make a capitaly repayment.
You never know when you might hit hard times.
Having a IO mortgage puts the houseowner in charge and not the mortgage company.
The problem is now that lenders are reducing the availability of such efficacious mortgage facilities.
Anybody who can, get yourself a IO mortgage for as long term as possible.
Ben Reeve-Lewis
21:54 PM, 16th February 2012, About 12 years ago
Yes Ian lenders are supposed to act reasonably towards their customers when seeking repossession but they don’t. The Mortgage Conduct of Business Rules and the Mortgage Pre-Action Protocol are both quite clear the repossession should be a last resort only.
The reason why I win 99% of my court cases is because lenders flout this and I simply point it out to the judge.
In I seem tor recall, 2009 the courts brought in the protocol to stop lenders seeking possession without acting reasonably. By 2010 it was clear that they weren’t doing this so they had to bring in a new court form, an N123 that shows the court what they have done before seeking possession and yet this still didn’t work so last year the courts had to change the protocol from guidelines into rules.
In 2010 the FSA’s Mortgage Market review stated;
The findings from our thematic reviews demonstrated that firms were often too quick to take repossession action, focusing too strongly on recovering arrears without reference to the borrower’s individual circumstances. In addition, some firms explored very few forbearance options before taking legal action against borrowers. We observed these poor practices across the mortgage market.” (Para 4.6 Mortgage Market Review 2010)
The Council for Mortgage Lenders insists that banks these days are exercising more tolerance and help to people in difficulty. Don’t believe a word.
I am in Lambeth County Court tomorrow defending a guy who owes £1,060 arrears for a period he spent unemployed. He got a new job a month ago, has offered to pay the monthly installments plus £80 a month off of the arrears and yet the lenders are still pushing for an outright possession order. Reasonable my arse
23:01 PM, 16th February 2012, About 12 years ago
It doesn't seem financially prudent.
Most of these properties probably have negative equity, so what is the point of repossessing
I am in the same situation.
I have a flat that is in receivership, caused by a LHA tenant not paying full rent.
The flat is worth £115000.00
Mortgage is £!90000.00
I can rent the flat out to more than meet the monthly mortgage interest only payment.
They refused to capitalise the arrears of about £9500.00 which would have added about £25.00 to the monthly mortgage repayment.
So for about 5 months now they have no rent coming in; if they ever sell, they will makew a massive loss.
They have NO possibility of recovery from me EVER,due to my circumstances.
They also would have wanted the mortgage repaid in 6 years time.
No chance of that.
So this lender faces a massive loss.
Guess who the lender is..............Northern Rock, the bad bit!?
So the govt is going to take a massive unecessary hit.
Go figure!?
I lose nothing as the deposit was paid for with credit card money which I am not ever paying back.
So we have a rentable property kept out of the rental market for months even though there is strong rental demand.
Ben Reeve-Lewis
23:18 PM, 16th February 2012, About 12 years ago
No its madder than that Paul, the vast majority of my clients have very healthy equity. Only about 10% are negative but if you are on benefits you cant re-mortgage to release the equity so its on paper only unless the house is sold or repossessed.
The lenders will always be looking for outright possession orders on arrears of often less than £2,000 even where there is £100,000 equity. That’s what angers me and drives my clients to despair and depression.
If you are on £75 a week job seekers allowance, no kids etc and you have just lost your job through no fault of your own you are screwed. There are no extra DWP benefits to maximise other than converting to IO mortgage and claiming SMI.
People with kids will be getting Child or working tax credit, child benefit, income support so you have more to juggle with when negotiating with the banks.
As far as the lenders are concerned the equity is neither here nor there. It’s the monthly payment or nowt and whatever you offer as a monthly sum off of the arrears they always reject as unreasonable, even though a handy little case law from 1996 says otherwise. Cheltenham and Gloucester Building Society v. Norgan set the precedent whereby as long as the monthly offer will clear the arrears within the remaining life of the mortgage it must be considered a ‘Reasonable offer’.
So for instance £10,000 arrears with 10 years left on the mortgage gives you 120 monthly payments @£83 a month. As long as the borrower can meet that the lender should accept it. It is called the ‘Norgan figure’.
I had a set-to with Santander last year where a guy who lost his job regained employment and could afford the mortgage again and he offered £100 a month off of the arrears. Santander rejected his offer as unreasonable and pushed for outright possession (he too had healthy equity) I found out he still had 17 years left on the mortgage and when I did a Norgan calculation the Norgan figure was £48 a month, so I contacted the lender again and not only rejected their assertion that the offer wasn’t acceptable but I dropped it by £52, citing the Norgan principle and they backed off.
Sometimes this aspect of my work feels lighting off a pack of wild dogs
1:00 AM, 17th February 2012, About 12 years ago
Your strategies surely make financial sense in that you avoid a lender crystalising an outright loss.
Selling property in a depressive market for less than the market value; effectively using up any positive equity just causes a further depressive effect on property prices.
I don't understand the logic of these lenders.
They are effectively cutting their own throats, making their loan book worse by their stupid actions.
Your practical approach to these issues sees to me to be eminently pragmatic as it avoids crytalising losses and eventually these people invarably get back on their feet and recover the situation.
I really don't understand the logic.
Perhaps if the HMRC advised that lenders would NOT be able to offset their losses against corporation tax caused by a refusal to accept a Norgan plan that might concentrate their minds to behave differently?
This as not every person will have positive equity to be wasted by a lender seekingpossession for their mortgage debt.
All for the sake of £48.00; you couldn't make it up.
This is why I always suggest build up loads of credit card facilities; you never know when you might need them.
One wouldn't really care if you ran up a credit card debt if you still have the roof over your head and you have preserved your equity rather than the lender waste it by repossessing!