Property investor

Protecting your credit rating – even in these difficult times – should be a priority, writes JACK FAGAN

WHILE MUCH of the attention in the crisis-hit property industry is focused on Nama and legal action by developers to stop apartment investors reneging on purchase contracts, a wider problem relating to mortgage repayments is fast emerging as another major headache. And with mortgage rates going up, things can only get worse.

A recent suggestion by the OECD that a Nama-style rescue operation should be introduced to help homeowners struggling to pay their mortgages will find approval in all quarters. A tightly managed financial support system could make a hell of a difference to those finding it difficult to meet their mortgage repayments for a number of reasons, especially after the loss of a job.

Lenders have no interest in repossessing homes and invariably do so only as a last resort. If a rescue formula is ultimately adopted by the authorities, it would need to be carefully monitored to ensure that any improvement in the personal circumstances of the borrower or in the economy generally would be immediately reflected in the repayments schedule. The ground rules could also provide for a clawback in the event of a turnaround in the borrower’s finances.

It is no secret that many homeowners have been put to the pin of their collar to make ends meet. With over 6,000 mortgage holders a year reported to be “delinquent” on their repayments, this figure is widely seen as the tip of the iceberg especially as interest rates have been at historic lows for the last few years.

Mortgage expert Frank Conway of Irish Mortgage Corporation is convinced of the need for what he calls “financial education and financial consoling” to help those struggling to meet their commitments.

There is clear evidence that many people are choosing to pay their credit card and personal loans rather than their mortgages. Conway says this “unique behaviour” has arisen as a result of talk about mortgage moratoria. Some people believe their mortgage provider will not take action against them if they fall into arrears whereas not paying a credit card could immediately cut them off from a form of household income. “We now have a situation where negative income is a fact of life and a lifeline for keeping the family finances on track.”

With the money supply getting tighter there is a need for borrowers to know the difference between priority and secondary creditors. Priority debt – the biggest and most visible in most people’s lives – is a mortgage and should be paid first. A car loan can also be categorised as a priority debt if the vehicle is essential for travelling to and from work. There are also other debts considered priority, like household utilities, court fines and rent. In short, debts that relate to basic human functions such as shelter, food, fuel, etc.

Secondary debts are generally in other areas, like personal borrowings, credit cards and store card charges. While all debts have to be repaid, some are more important than others, especially when personal budgets are tight.

For most people it is crucially important that they should be able to access credit in the future. In the new tight-fisted banking environment that has replaced one where bankers dished out the money, often recklessly, it is more important than ever that a borrower should have a good track record when it comes to personal credit reports. In some countries these credit reports are used for everything from credit approval to job applications and even hospital admissions.

As the economy continues to limp along with no real sign of a sustained recovery in the labour market, it has never been more important for those struggling financially to protect their personal credit rating at all costs. Not doing so can result in a failure to secure credit in the future. Those in difficulties with credit, particularly a bank overdraft, would be well advised to maintain close contact with their bank to work out a fair repayment programme and, as part of the deal, get a commitment from the bank that they will work with them to maintain a good credit record report.

With competition in the mortgage market disappearing fast, a good credit rating is more vital than ever to support a mortgage application down the line. Anyone wanting to check out their personal credit report can do so by logging on to icb.ie. Errors can sometimes creep into these reports but, by and large, they will determine whether you are a safe bet or not.