Debt warning over Brown mortgage plan
Thursday, 4 December 2008 12:00 AM
The government's mortgage rescue plans may provide breathing space but could significantly increase overall debt and lead to negative equity, experts have warned.
The new Homeowner Mortgage Support Scheme, announced yesterday by Gordon Brown after the Queen's Speech, will allow homeowners facing a sudden loss of income to cut their mortgage repayments.
This will be done by the borrower deferring a proportion of their interest payments on their mortgage for up to two years - but deferred payments will be rolled back into the total still owed.
The government will guarantee this sum to lenders in the case of a borrower then facing repossession - so banks are not taking on extra risk.
However, borrowers are being warned their size of their mortgage debt will grow because of the action.
"Capitalising two years' deferred mortgage payments could significantly add to a borrower's overall debt, which combined with falling property prices does raise the question of negative equity," said Andrew Strange, director of policy at the Association of Mortgage Intermediaries (AMI).
"Clearly, we welcome any move to further assist homeowners who are facing financial difficulties and risk losing their homes. However, as always the devil will be in the detail."
Housing minister Margaret Beckett said last night the support scheme would give borrowers time to deal with job losses and not fear repossessions.
"This scheme will give households the breathing space to get back on their feet again and help ensure they do not face or fear repossession," she said.
"We want to see all lenders signing up to this scheme as part of their efforts to ensure that repossession is always an absolute last resort."
So far Bank of Scotland, Nationwide, Abbey, Lloyds TSB, Northern Rock, Barclays, Royal Bank of Scotland and HSBC have all signed up for the deal - covering 70 per cent of the mortgage market.
Gary Hoffman, chief executive of Northern Rock, which yesterday agreed not to start repossession action against borrowers for the first six months they are in arrears, welcomed the move.
He said: "It will provide another way of helping customers who are facing repayment difficulties. The company will now work through the details of the scheme with the government.
"At Northern Rock we are committed to working with customers to try and agree debt management solutions and repossession of their property is a last resort."
The move has also been welcomed by Citizens Advice, but the charity warns homeowners using the scheme need to put in place long-term plans to solve their financial problems.
"To ensure borrowers are not saddled with unreasonable and excessive payments after the two years are up it will be vital that both parties, [borrowers and lenders] explore all the options available during this period," said Citizens Advice director of public policy Teresa Perchard
"More also needs to be done to help those on the margins of the mortgage market whose lenders have not signed up to this scheme."
She added: "Anyone who is has experienced a reduction in income should talk to their lender straight away.
"All lenders should provide an understanding and constructive response and help their customers arrive at a solution, taking into account the customers circumstances and ability to repay their debts."
Ms Perchard added if a lender is not understanding to concerns then borrowers should get free, confidential, impartial advice without delay.
"Getting advice, even at a late stage can help many people secure a workable agreement with the mortgage lender which prevents them from losing their home," she added.
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