Beware, the Repo man

Your home is the security the lending company holds in case you stop making repayments into your mortgage. The worst that can happen is, they will repossess you house. But why does this happen?

How high can they go?

There was a time in this country when interest rates climbed constantly as the Chancellor, who was at that time in charge of controlling the Bank of England Base Rate, tried to slow the growth in the economy.

The economy was strong in the nineteen eighties and the housing market in particular was very, very buoyant. The Government had encouraged a lot of young people into the market and there had been house purchases had been booming. Many of those purchases had been on standard variable rate mortgages and those buyers increasingly felt the pinch as interest rates rose higher and higher month after month.

It was a time when you could sit in a bar or café and hear people talking about interest rates and everybody was asking the same question, “how high could they go?” and that was usually followed by the next question, “How are we going to afford it?” Well, the answer to the first was higher, much higher. Through the 10% mark and on up, they went. Until finally the economy started to slow its growth and the braking effect of the high interest rates had worked. But it was too late.

The country fell into recession; the worst for decades, now, everywhere you looked people were losing their jobs as industries laid people off. Most of those had mortgages. Most of those didn’t have payment protection insurance and most of those plunged immediately into debt.

Talk to me

The knee-jerk reaction when somebody loses their job and can’t find another way to pay anything like the same income is to cut back on the largest expenses. This inevitably means the mortgage.

If you find yourself in financial trouble, speak to the lender; you will be able to work out a repayment amount that will be less than they are asking for but is more compatible with what you hopefully can afford. The difference will be put aside and will be marked on your account as arrears. Clearly the arrears is going to adversely affect you credit rating, but in times like these, your credit rating is actually irrelevant as you are facing losing your house.

Weeks turn into days

When you arrange to set up a lower repayment with your lender they will state an approximate time period that they are prepared to accept these lower payments and this will be influenced by how much arrears you are building up.

Unfortunately, if you can’t start repaying the full amount again before that time is over then the lender will be forced to take action to repossess your house, even if the reason for the arrears isn’t really your fault. If you were made redundant for example, many think that just to declare innocence is a good enough reason for the lender not to repossess. But the mortgage contract obliges you to make those payments. It might not be your fault, but it’s your responsibility.

Court case

The lender will take you to court to formally take possession of your house and once they have it they will put it on the market to sell, often at a vastly reduced amount because they want a quick sale. Your misfortune can be somebody else’s gain.

Watch the birdie

This is the simple story of how repossession can occur. It’s an easy position to get into if you don’t consider the possible consequences of taking out a mortgage and the way interest rates change. These days the market isn’t as volatile as it was twenty years ago, but rates can change and the markets tend to be cyclical, so it’s always worth asking how much the monthly repayments will be on a much higher interest rate than now and keeping an eye on what the market is doing.

External Links:

• FSA – Consumer Information – Mortgages – Information on mortgages from the FSA
• Mortgages : Directgov – Money tax and benefits – More information from the official government advice website

More Information:

• Your Home Is At Risk If..
  “Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it”. Words that have to be printed on any promotional material for mortgages or home-owner secured loans. Is this the only reason you should keep paying your mortgage?
• Paying Off Your Mortgage Early
  Twenty five years is the average period of a mortgage… Twenty five years is a long time! The dream of many people is to pay off their mortgage early. Can it be done?
• What Is A Mortgage?
  With the price of property ever increasing and no sign of the long awaited bursting bubble of the housing market, we ask what can young first time buyers do to gain their freedom and set up a home of their own in such an expensive arena and what is a mortgage anyway?

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