Borrowers feel the mortgage pinch
Many homeowners are struggling to meet their monthly repayments, so what can they do? Caroline Maddenreports
VIEWED IN isolation, last week's interest rate increase may not have seemed like a major blow for borrowers. However, when soaring fuel and food prices - not to mention lengthening dole queues - are factored into the equation, it's clear that this rate hike could be the final straw for some overstretched homeowners.
So just how many mortgage-holders are struggling to meet their monthly repayments and what can they do to avert disaster?
Figures released last week by Court Services revealed that the number of repossession orders issued by the High Court jumped from 59 in the first six months of 2007, to 126 so far this year. Of course, for the people involved in these cases, losing their home would have been a devastating blow, but it's important for homeowners to remember that the repossession rate in Ireland remains very low by international standards. In the US, for example, some 2.5 per cent of residential mortgages were in the foreclosure process at the end of the first quarter of this year.
The situation has become so extreme in states such as California that some homeowners who have fallen into arrears are simply walking away from their homes, despite the fact that this will severely impair their credit rating. Although the repossession of family homes is still rare in Ireland, there are clear signals that a growing number of mortgage-holders are getting into difficulty.
For example, at the end of 2007, 4,111 people (compared to 3,424 people a year earlier) were in receipt of the mortgage interest supplement, a State-backed income support available to eligible individuals unable meet their mortgage interest repayments. By the middle of June, the number of people claiming the supplement had shot up by almost 1,000 to 5,093.
The Irish Banking Federation, which represents all of the mainstream mortgage lenders in the Irish market, says it has not yet received any reports from its members of a notable pick-up in customers falling behind on their mortgage repayments.
"Having said that, everybody would expect ordinarily that there would be some shift upwards in terms of arrears when you have a period of economic slowdown," a federation spokesman said. "Things get tighter for people."
So what should cash-strapped homeowners do if they don't know where their next mortgage repayment is going to come from?
"The first thing I would say to everybody is there's no shame in getting into financial difficulty," says Michael Dowling of the Irish Mortgage Advisers Federation (Imaf).
"It happens to the best of people. The second thing I would always say to people is if you're having difficulty, put your hand up," Dowling continues. "Either come directly to the bank you dealt with in terms of arranging the mortgage, or talk to your broker if your mortgage was arranged through a mortgage broker. Both parties will be able to help you in terms of looking at options that are open to you."
One very simple, albeit temporary, solution is to arrange a mortgage payment holiday, or moratorium, for a period of three or six months. This break could well give the borrower the breathing space they need - perhaps to find a new job if they've been made redundant - and to get back on track.
However, a payment holiday should not be taken lightly.
"It's important that if people do exercise that option that they use it wisely, because ultimately they may not have that option again for another period," Dowling warns. So it's vital that the borrower uses the break as an opportunity to save hard and make the necessary cut-backs to their lifestyle so that they won't fall back into the same rut as soon as the repayments resume.
It is well worth contacting the Money Advice and Budgeting Service (www.mabs.ie) who can provide free and confidential advice and guidance in this area.
Another option is to temporarily switch from making capital and interest repayments on the mortgage, to making interest-only repayments. It may also be possible to negotiate a longer loan term with the lender, for example extending a 20-year mortgage to a 25 or 30-year term. Both of these options will bring down the mortgage bill and give the borrower some much-needed wriggle room in their monthly budget.
Mortgage-holders though can, and do, resort to more extreme "solutions". In the UK, growing numbers of householders are using credit cards and loans to cover their mortgage bill. Unfortunately using expensive short-term credit to service a mortgage in this way only compounds the problem.
"If you're in a hole, stop digging," says mortgage broker and financial advisor Liam Ferguson. "Your mortgage is probably the cheapest form of debt you've got and can get, and if you can't meet them [repayments on your mortgage], then borrowing through another source which is probably going to be dearer in order to pay the repayments on a cheaper loan - that's a house of cards."
Another drastic move which overburdened borrowers may be toying with is downsizing to a smaller home in an attempt to alleviate the strain of servicing a large mortgage. In normal circumstances this might well be a prudent move, but if the person has already fallen behind on their mortgage payments, moving to a smaller home could create as many problems as it solves.
"It isn't necessarily the best time to be considering downsizing because the market is very, very slow at the moment.
"There's very little activity and what is selling is at much reduced prices," points out Imaf's Dowling. "You may not improve the situation."
Even if the borrower manages to generate enough money from the sale to clear their debts (which in the current market is by no means guaranteed), the fact that they fell into arrears will have damaged their credit history so they may struggle to get back on to the property ladder.
"In effect you're going to solve the bank's problem, but you're going to create another problem for yourself in trying to take out a new mortgage," he warns. "You will find that that very same bank won't lend you money."
Therefore before taking such drastic action, it's best for borrowers to work with their lender to find a workable solution.
However, Dowling has noticed that banks are not particularly sympathetic towards buy-to-let investors, who are increasingly requesting payment breaks on their mortgages due to tenants failing to pay rent.
"Lenders are taking the view that these are all experienced mortgage-holders," he says.
"I'm not seeing lenders at the moment being terribly receptive to the requests for moratoriums for investors."
Fortunately, the opposite appears to be the case for owner-occupiers.
In Ferguson's experience, most banks are far more interested in finding a mutually agreeable solution than pursuing their customers through the courts. "Lenders do want to find other ways around it, so contact your lender, tell them that you're experiencing financial difficulties and see if you can come to an arrangement," he recommends.
A spokesman for the Irish Banking Federation stresses that repossession really is the last resort for banks. "In a falling market, a house on your hands is of less value than a house which is actually paying for itself in terms of the mortgage," he says. "Everybody's a loser in that situation."
Do's and dont's of mortgage distress
- Contact your bank or the broker who arranged the mortgage as soon as you are in difficulties. Free independent advice is available from the Money Advice and Budgeting Service (www.mabs.ie)
- Look at a payment holiday
- Look at just paying the interest for a period
- Look at extending the term of your mortgage.
- Use other forms of borrowing, credit cards, over drafts etc to pay your mortgage
- Presume that selling up and moving to a smaller property is necessarily the solution.