A serious new blow to mortgage borrowers

by Ben Reeve-Lewis

11:46 AM, 16th February 2012
About 9 years ago

A serious new blow to mortgage borrowers

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A serious new blow to mortgage borrowers

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.


Mark Alexander

11:15 AM, 21st February 2012
About 9 years ago

I would urge all landlords who may find themselves getting sucked into lenders propaganda such as that mentioned by above to read my blog which is linked below prior to making any over-payments on their buy to let mortgages... 

12:51 PM, 21st February 2012
About 9 years ago

I am aware of what NRAM are trying to do; what I cannot work out is why they want to take a massive hit on my property as I will never pay them back the shortfall when they sell about £90000 less than the mortgage.
The property produces positive cashflow.
All they have to do is capitalise the arrears which will cost about £25 extra mortgage payment.
They are idiots or do they think they will recover from me.......not in my lifetime; I will ensure I have no estate that they can get their sticky fingers on.
And in 12 years time the debt will be statute barred.
By selling they just crystalise a loss.

13:01 PM, 21st February 2012
About 9 years ago

Providing you have a 2nd charge  or interest on your PPR in the name or a trusted person and or even 3rd and fourth charges then it doesnt' matter if you don't pay the debt; they can't touch you.
12 years time the debts are statute barred.
You won't have eough income to make any payments.
Just ignore all the debt collection companies as if you initiate contact the 6 year statute barring starts from that contact.
them calling you doesn't count; just refuse to speak to them and put phone down.
They stop calling after a while!

8:04 AM, 25th February 2012
About 9 years ago

Hi Paul, how many other properties did you buy on your credit card that you can't pay the mortgage for, or the credit card payments for that matter?
It's this sort of irresponsible behaviour that got us in this mess, and you have the audacity to blame the banks!
I hope they repossess and auction off quickly, as like you said you're never going to pay them back and it's their only way to recover at least some of their money, or did you forget it was their money and their property?

11:19 AM, 25th February 2012
About 9 years ago

No the only people who have to pay back debts are the ones that will lose too much if they don't.
The only way poor people can compete with rich people is via credit.
This enables you to punch above your weight.
This is what you have to do if you are a wage slave.
The banks have NOT lost money; they just sell the debt on and the loss difference they offset against their corporation tax bill.
Only the taxpayer suffers.
If HMRC introduced a regulation that all unsecured credit losses could NOT be offset against corporation tax you you see a rapid contraction in credit facilities offered.
The govt is never going to allow this to happen as they know real wages are not enough to support the economy.
So the banks win either way and it is the taxpayer that suffers everytime.
In my case why would my mortgage company want to repossess and crystalise a loss apart from offsetting against corporation tax.
Well as NRAM is owned by the govt it doesn't make much commercial logic.
Far better would be to keep the property rented out and when the value increases to the mortgage amount then they could sell.
Well as the mortgage has to be redeemed in 6 years time and I don't stand a chance of ever obtaining another mortgage the property would be sold then and hopefully they will make less of a loss.
But I won't be paying.any shortfall.
Of course the logical thing to do would be to extend the mortgage term for another 20 years; but that is far to sensible a solution.
If one is able to sustain mortgage payments why repossess.
So because NRAM refuse to capitalise the arrears, caused by a wrongun LHA claimant they stand to lose £60000.00 with no hope of recovery from me.
By the way I'd run out of credit card money by then, otherwise I would have used those facilities to recover the situation.
Remember you only buy property to make money out of it and then hopefully sell fro a large capital gain.
The fact that this is facilitated by borrowed money is irrelevant.
Borrowed money is just required so you can make money.
There is nothing holy about ownership; it is just a means to an end.
They have an extreme situation in Spain presently where unemployment and the dire financial situation is causing many to just stop paying their mortgages.
The banks don't repossess as this will show on their balance sheet and as  there are about 1 1/2 million unsold new homes they don't want to add to futher depressing their balance sheet.
So they are being very pragmatic hoping that things will turn round and people will start to catch up on their mortgage payments.
They will eventually.
All my other properties are producing positive cashflow but only because interest rates are low.
So the £300000.00 of negative equity I have will not need to be crystalised as the mortgages are being serviced, why would a lender wish to repossess if the mortgage is being serviced!?
So no none of my properties will be going to auction unless interest rates increase.
That is never going to happen as the govt knows they are sitting on a timebomb of debt which would go off if they increased rates.
They would have to pump billions more to bolster the banks to cover all the property losses, if banks repossessed.
Corporation tax receipts would reduce massively and govt would have to increase taxes.
So be careful what you wish for!?

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