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MORTGAGE CASE STUDY: problems?

• Abigail and Mark Upton took out a mortgage in March 1999. The account is now in arrears to the tune of £51,000, including repayment arrears of £1,100, (which represents three months payments). Their mortgage is linked to a low cost, with-profits endowment policy.

• The property is worth about £140,000.

• They acknowledge that they should have addressed the problem earlier, but Mark has been away looking for jobs and Abigail did not want to take any action on her own.

• Four months ago, their business failed. They had run their own restaurant business but had to abandon this once debts started to escalate. They ended up owing £6,000 to the bank, about half of which has now been paid off. They are being threatened by the bank with legal action to recover the outstanding amount.

• They owe an additional £1,000 in total on credit cards and other small debts.

• They have very little cash in the bank and no other resources.

• Both Abigail and Mark have found jobs and between them earn £1,000 per month. The jobs are not ideal but have been taken out of desperation. Aside from the mortgage, their outgoings are £500 per month plus living expenses.

  Although of no consolation, many people find themselves in similar situations to Abigail and Mark – hoping the problems will pass; not wanting to admit that it is a problem, perhaps not even recognising their situation to represent a problem; too embarrassing to discuss it with each other and with anyone else.

  Apart from practical decisions which could perhaps have been addressed at an earlier stage with the business – all part of the financial planning process – they should have contacted their lender as soon as they saw the possibility of having to stop their mortgage payments. Lenders are in business to make a profit, like any other business, but they may be able to offer practical advice before you go into payment arrears; they respond well to forethought in lenders. Once payments are missed, however, the greater the amount of arrears and the greater the time before contact, the more limited becomes the advice and sympathy available.

  That Lenders are required to deal with such cases sympathetically and positively. The lender will, with the consent of the borrower(s), discuss potential alternative solutions which might resolve the situation.

  Even at this stage, however, there are routes open to them, provided they have the determination to see them through and to follow advice. As so many different strands need to be brought together, the advice of a specialist mortgage adviser may be appropriate – but check the costs involved beforehand. Other than approaching a professional financial adviser, Abigail and Mark could also have initial conversations with the local Citizens Advice Bureau, a Money Advice Centre or the Consumer Credit Counselling Service.

  The first thing for Abigail and Mark to do is to compile a written statement of income and expenditure to identify their precise financial situation and so help them determine the most sensible courses of action. This will inevitably raise other questions.

  Their adviser will see that they have to pay just over £300 per month to the lending institution out of an income of £1,000. They state that their outgoings are £500 per month. As it would be difficult to live on the balance, the adviser must determine what exactly the £500 is paid out on. Is it spent on essentials or less vital purchases? What lifestyle do they live?

  The lender must be made aware of other debts and the degree of urgency in servicing these. Have minimum payments been made on credit cards and other debts? Are the couple in default with the bank yet? Have endowment premiums been kept up to date?

  By running through income and expenditure, the adviser may secure agreement to put a certain minimum amount towards the mortgage each month, and to reduce less essential payments elsewhere.

  As the endowment has been running for only five years, surrender or sale of the policy is not a cost effective use of the product. (Cancellation or continuation of such a policy is often a difficult decision, and should be considered only with qualified professional help). As a last resort, however, this is a source of cash which can be tapped if necessary. Arguably, it is better to cash in the policy than lose the house. If this is done, the mortgage would be converted to the capital and interest method and (perhaps) a rescheduled term might be contemplated.

  Assuming that the borrowers will pay as much as they can towards the mortgage, various options are available:

  Ideally, the couple should trim expenditure to the bare minimum to enable repayments to be made over and above the monthly repayment, thereby enabling the arrears to be paid off; if they cut their cost of living sharply, they may be able to meet the repayments, enabling the lender to freeze the arrears pending a review in 1- 3 months time. If they can afford only a proportion of the repayment, the debt will continue to escalate, so any agreed minimum repayment must be reviewed frequently, taking stock of any changes in circumstances. Assuming that the endowment policy has not lapsed, the insurance company may be prepared to offer a premium ‘holiday’, reducing monthly outgoings. The nature of the endowment product will determine whether an extension of the mortgage term is an option. If so, this must be used selectively. The lender should find out whether all sources of income have been tapped; this might include debts outstanding from their former business. They might even consider letting to derive an income from the property, though some lenders would not agree to this as a matter of policy. If the financial problems are pressing from all directions, the couple may have to consider putting the property on the market and trading down to something more affordable, or perhaps renting.

  
  

  What happens if, despite all good intentions, their situation worsens? Suppose they should both lose their jobs?

  As the mortgage post-dates the revised Income Support - Mortgage Interest (ISMI) arrangements, they will not receive ISMI during the first 9 months of their claim from the Department for Work and Pensions.

  If they have £8,000 or more in investments, ISMI is lost. If they obtain employment it will also be lost.

  If unemployment is prolonged, and they cannot reach any accommodation with their creditors, repossession may be the next step, even though lenders will take every step necessary to avoid such action.

  Unless an arrangement is made, the lender will normally commence legal proceedings when arrears of three months are owed.

  The lender will apply for a possession order (England and Wales) or a Notice of Default/Calling Up Notice (Scotland).

  When the case is presented to the Court it may order outright possession; award a suspended possession order; or adjourn or suspend proceedings.

  At this stage, the lender has to be fully prepared to prove to the Court that all possible steps have been taken, and seen to be taken, to assist Mark and Abigail to bring the account to order.

  An outright order will give the lender the right to obtain vacant possession in (usually) 28 days. A suspended order will require the borrower to make payments in accordance with the Court’s instructions. Adjournment/suspension delays the proceedings pending specified actions by either party.

  If possession is obtained, the lender can exercise its right to possession on the specified day.

  The property is valued and brought to market by the most suitable method. A buyer is secured and the monies obtained used to pay off the debit balance on the mortgage. If insufficient, the lender has the right to pursue the shortfall by suing the borrower for the amount owed. If a Mortgage Indemnity Guarantee is in place, this will be claimed upon to reduce any loss.

  The Mortgage Indemnity Guarantee insurers are likely to use their rights under the Guarantee to claim back any loss they may sustain from Mark and Abigail.

REMEMBER You should not use any information contained on this page as the basis of any action until you have discussed matters with your financial adviser.