More than 138 homes have been repossessed this year, and approximately 14,000 people are behind with their mortgage payments. With these figures set to rise, how can mortgage holders manage their repayments?
THE IRISH Banking Federation (IBF) has estimated that there are approximately 14,000 people in Ireland with mortgages in arrears. With unemployment on the rise, and an increasing number of people receiving pay cuts and losing bonus payments, this figure is set to rise. In the first seven months of 2009, the Irish courts granted mortgage lenders 138 orders for possession. In simple terms, this means more than 138 people lost their homes or properties this year.
The rate at which properties are repossessed is unlikely to decline in the immediate future, with the Master of the High Court, Edmund Honohan SC, predicting an “avalanche” of cases during the next few months and the moratorium on lending institutions seeking repossession coming to an end.
In February, a 12-month moratorium was agreed with Bank of Ireland and Allied Irish Bank, preventing them taking legal action for a year after mortgage holders fall into arrears. As home repossessions were predicted to increase in line with rising unemployment levels, a moratorium of six months was applied to all other lenders.
There are many reasons people are unable to meet mortgage repayments, thus facing arrears and repossession. Contrary to popular belief, unemployment is probably number three on the list of reasons people find themselves in financial difficulty according to Dermot Nutley, head of operations at sub-prime lender Start Mortgages. “The main reasons we find are loss of income, from people receiving pay cuts and not receiving bonus payments. Self-employed people . . . also find themselves in sudden debt from not receiving money owed by clients.”
This is echoed by Jim Ryan of Ulster Bank, who says marriage break-up, health problems, living beyond one’s means and excess debt due to short-term loans also contribute.
BUT WHAT SHOULDyou do if you find yourself facing financial difficulty, in arrears and unable to meet mortgage repayments? Lenders are adamant that mortgage-holders make contact immediately if they find themselves in financial difficulty.
Allowing arrears to build, and missing repayments does no-one any favours, as it is in the borrower’s interest to protect any equity built up in the home.
Brendan Nevin, head of personal lending at Bank of Ireland says: “No matter why our customers may find themselves facing financial difficulty, we would encourage them to come and talk to us as early as possible and we will work with them to reach a satisfactory outcome.”
There are a number of options available to people facing a period of financial difficulty.
According to Nutley, these include “deferring part of the monthly repayment, opting for a full monthly deferral, or choosing to go on an interest-only repayment scheme for a time”. However, he is quick to warn that all these options can have long-term implications, as the borrower will still have to pay the money owed.
Mortgage-holders with Ulster Bank can opt for a “flex option, which allows customers a reduced repayment facility on their mortgage repayments or a full payment break,” Ryan says, adding the latter option “is the very last resort, and all other options are carefully taken into consideration before reaching this decision”.
To clear arrears, the borrower can extend the term of the loan, repay arrears over a period by means of a step-up payment, or when the borrower is meeting their regular repayments they can seek to have the arrears spread over the residual period of the loan, Ryan adds.
When negotiating an arrangement, the borrower should take a realistic view of the prospects for paying off the debt, assessing future earning potential, the amount of capital invested in the house, and how much longer the loan has to run.
AN ALTERNATIVE FORthe homeowner facing a lengthy period of default and arrears is to sell the home. However, this option can often prove very difficult for homeowners, many of whom are trapped in negative equity. According to the Economic and Social Research Institute (ESRI), people who bought a house in 2003 will have to wait another four years before they move out of negative equity, while those who bought close to the peak in 2007 will have to wait until 2030.
While selling may seem unpalatable to many, it is far better than losing the property through a court order. Going to court is not a good option, as the mortgage holder can be left with a huge legal bill following the granting of an order, having to pay the legal costs of the lender as well as their own. These costs could wipe out any equity built up in the property.
A number of people are surrendering their homes to banks, instead of selling the properties or going to court. The Master of the High Court, who deals with procedural court applications, has warned against taking this action. Local authorities were less likely to give housing to people who gave the keys back to the lender, he says: “they treat that as being self-inflicted homelessness”.
After a lapse in mortgage payments, the balance owed may exceed the original loan. This occurs when lenders penalise homeowners who miss mortgage repayments. Interest is added to the amount of arrears accumulated by the mortgage holder, and as a result, the amount owed starts to increase as soon as repayments are missed.
However, according to Nutley, this fee can be avoided if people acknowledge the problem and make an effort to make some sort of repayment. “If we get a person who is genuine about working to solve payment problems, we will cut the penalty fees as an incentive to the customer to face up to the problem.”
Nevin says any sum not paid by its due date is subject to an additional interest rate charge at the rate of 0.5 per cent per month or part of a month (ie 6 per cent per annum), subject to a minimum of €2.54 per month, for the due date until the payment is made.
This is applied to the arrears amount only and not the outstanding mortgage balance, with the additional interest charge intended to cover the bank’s increased administration and related charges due to the borrower’s default.
Ryan says no penalty charge applies on missed payments for Ulster Bank mortgages, but adds: “the cost of credit does increase as the outstanding mortgage balance does not reduce, so we therefore advise all customers to contact us as early as possible to discuss other ways of dealing with financial difficulties.”
Ultimately, while it is often easier for the borrower to ignore arrears, they will not go away. They will just accumulate.
The solution, according to Nutley, is: “Get in contact as soon as you can with the mortgage lender. This is the absolute most important thing as traditionally the biggest challenge we face is people burying their heads in the sand.”
