Loans Articles

The financial news at the moment is full of nothing other than the continued slowdown in the UK economy and the potential consequences for all of us, particularly those of us who have a mortgage on their home, or any other form of secured or even unsecured debt.

There has been a particular focus on the housing and mortgage markets recently and where this is heading. With house prices remaining, at best, flat and likely to reduce depending on the type of property and where it is situated, consumer confidence is at an all time low with regards to purchasing property. Coupled with this, the banking and lending sector are in the middle of their own financial crisis and due to the fact that the rate at which the banks borrow from each other, LIBOR (London Inter Bank Offered Rate), remains much higher than the Bank of England Base Rate, there seems to be very little available money in the wholesale market to lend to individuals, with the result that many of the major lenders are withdrawing mortgage products and tightening their lending criteria on a daily basis.

These factors inevitably lead to concerns over what will happen to those individuals who currently have a mortgage on their property and in particular, those borrowers who are either struggling with their monthly repayments or are about to come to the end of a cheap fixed rate deal. It is estimated that 1.4m borrowers will be in this situation throughout the course of 2008, with the prospect of increases in their payments of up to 60% and the possibility that they will not be able to obtain a more competitive deal elsewhere.

All these factors have led to concerns that there is likely to be an upsurge in the number of properties falling into arrears, leading to people’s homes being repossessed. During the course of 2007 we saw a huge increase in the number of repossessions taking place and this seems set to continue throughout 2008, with the level of repossessions already up by 16% for the first quarter of the year compared to the same period for last year.

It’s all very well talking about repossessions and the effect on the markets, but what about the individuals concerned, those unfortunate people who may be facing losing their home? What can they expect to happen, how does the process work and what, if anything, can they do to try and avoid the consequences of becoming homeless?

The whole rocky road to repossession starts with arrears on the mortgage, or secured loan. Once a single payment has been missed on a home loan the account is deemed to be in arrears. At this point the lender in question will write to the borrower informing them of the situation, the level of arrears and enquire as to how they intend to remedy the problem. If the borrower responds to the lender at this stage, often the problem can be rectified, with the borrower either making a payment to bring the account up to date, or with an agreement being reached with the lender to clear the arrears over a period of time.

If, however, the mortgage or loan account falls into two or more months arrears, then the lender has the right, under the terms and condition of the loan, to instigate legal proceedings for repossession of the property against the borrower.

The first time the borrower is likely to know about this stage is when they receive a letter from the lender’s Solicitor. This letter will normally state the level of arrears currently outstanding on the loan and that payment of these should be made within the next seven days, or the individual should contact the lender in order to arrange a mutually agreeable method of repaying the arrears. If the borrower fails to respond to this request within a reasonable timescale, then the lender is likely to initiate court proceedings to recover their losses.

The lender will apply to the County Court who will issue a summons to the borrower, which will state the name of the lender bringing the case, the amount in question and will give details of the date, time and location of the hearing. Usually the hearing will be held in the County Court which is most convenient for the defendant (i.e. the borrower). The date set for the hearing is normally between four and eight weeks from the onset of a claim, although this can vary depending on the area and the workload of the court. During this period both parties must provide to the court, a copy of all the documents on which they intend to rely to support their case. Each side must also provide copies of the same to each other prior to the hearing. If any documents are missing from those submitted prior to the hearing, they may be dismissed by the court if presented on the day. If, during the course of the waiting period, the arrears are cleared, or an agreement is reached between lender and borrower, then the hearing will be cancelled.

Once the case comes to court, the Judge will hear evidence firstly from the lender (as the person bringing the claim) as to reasons why a possession order should be granted, then secondly from the borrower who is defending the claim. After hearing all the evidence, the Judge will make his decision, which could be either to adjourn the case if further information is required or a decision can not be made, dismiss the case (usually this would only be if the lender had acted unfairly, or breached conditions of the loan), make a suspended possession order which allows the borrower to remain in their home as long as certain conditions are maintained (such as keeping up with repayments to the lender as set by the court), allow the borrower additional time to sell the property in order to avoid repossession, or to make an outright possession order. In all but the last scenario, the borrower will remain in their home, providing that certain conditions are met. If a full possession order is granted, then the borrower must vacate the property, or the Bailiffs will be instructed.

Repossession is always considered to be a last resort, both from the lenders and courts perspective; it is not usually in anyone’s interest to make an individual and his family homeless. The lender does not want the situation of having to sell a property, which they have taken into possession, at a greatly reduced price and incurring costs along the way and the borrower certainly does not want the prospect of being kicked out into the street and losing his home.

There are many reasons why an individual could find themselves in arrears with their home loan; often this is due to a change in personal circumstances such as an accident, long term illness or redundancy. In these circumstances there are a large number of insurance policies which are readily available in the market place to cover exactly this situation and such a policy should be considered by a borrower to be part and parcel of their mortgage, or loan, costs. Hopefully, a plan of this type will never be needed, but to dismiss these contracts is false economy. In many cases, however, arrears simply accumulate on the loan account through an individual’s bad financial management. These are often the cases where the borrower is often ashamed or embarrassed by the situation and tends to bury his head in the sand and hope that the problem will simply go away. Trust me…it won’t! There have been cases where a couple have had a joint mortgage on their home, but where the husband (for example…sorry fellas!) is responsible for paying the household bills and his wife goes to answer the door one day, thinking maybe it’s the Postman with a parcel, only to find the Bailiffs standing on the doorstep holding a possession order!

If you are having difficulties paying your mortgage or other loan, don’t allow any of the above scenarios to become your own story. In the first instance you should always contact your lender and let them know about the problem. They are required to take a sympathetic view of your circumstances and will help you in every way they are able to. There are also other organisations and professionals who are able to offer help and advice with arrears, such as the citizen’s advice bureau, debt councillors and financial advisers to name a few. Finally, remember that nobody really benefits from a repossession and it should always be considered as a last resort, but if you are having financial difficulties and do not take action to remedy the situation, it could happen to you!