Your Money Or Your Home!

You can lose your home if you don't keep up your mortgage repayments. However, other loans can also put you at great risk.

"Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it."

A quick Google search found almost 600,000 mentions of this `wealth warning' for homeowners. But what does it actually mean? The simple answer is that, unlike other personal debts, a mortgage, home loan, secured loan or second mortgage is secured against your property. Thus, if you cannot meet your repayments, then your home will eventually be seized by your lender, to be sold or auctioned later.

The good news is that, for most homeowners, this nightmare will never happen. During the last housing crash, home repossessions peaked at 75,500 in 1991, according to the Council of Mortgage Lenders (CML). During the recent housing boom, seizures plunged to a low of 8,200 in 2004, before climbing sharply.

The figure for 2008 is expected to rise further, so we could be looking at upwards of 40,000 seizures this year. Then again, there are 11.8 million mortgages in the UK, so only about 1 in 300 properties (0.34%) will be confiscated in 2008.

(Before I go on, it's worth pointing out a failing with the CML's repossession figures. The above figures only include problems caused by `first charge' or homebuyer loans.)

So, your mortgage lender has a financial interest in your property and can take action to secure its interest if you don't toe the line. But what starts mortgage borrowers on the road to losing their homes?

The road to repossession

If you miss one mortgage repayment, you'll probably receive nothing more than a call or a standard letter from your mortgage lender. Make up this missing repayment, and you'll probably hear nothing more (until you see an arrears fee on your annual statement; in effect, a fine for falling behind)

However, if your arrears begin to mount up, then you can look forward to the keen attentions of your lender's credit-control department. This team will put pressure on you to make good your arrears, while encouraging you to develop a plan to get things back on track. However, if you fall more than, say, six months in arrears, then a possession order is the likely outcome. In other words, the lender makes a court application to take possession of your home.

Nevertheless, an action to take possession may not lead to you surrendering your home. If you are able to reach some agreement with your lender, then it may back down and not enforce a possession order. Indeed, there are many times more possession orders than there are actual repossessions, so a possession order is not a death warrant for your home.

Then again, if you are unable to come up with a realistic plan to repay your arrears, then it is likely that your lender will apply to a court to seize your property. If this application is successful, then it will issue you with an eviction notice, ordering you to leave by a certain date. After this, it will seize your home and then put it up for sale or auction. In order to ensure a quick sale and repayment of your loan, this can be at a knock-down or fire-sale price.

Three safety-nets

If you want to prevent financial problems from spiralling out of control and causing you to lose your home, then you need a few safety-nets. For example, you could rely on:

 A cash cushion, emergency fund or rainy-day pot, that is, a Best Buy savings account containing say, three to twelve months' living expenses.

 Mortgage payment protection insurance (MPPI), which meets your monthly repayments for up to a year if you cannot work due to an accident, sickness or unemployment. However, this cover is often overpriced tripe, as I warned in The Billion-Pound Mortgage Swindle!

 The state safety-net, Income Support for homeowners, which I slammed in Big Holes In The Housing Safety-Net.

Personally, I'm wary of relying on insurance companies or the government to bail me out, so I prefer to fall back on savings when times are hard!

Paying your mortgage on credit

According to the latest Lending to Individuals survey from the Bank of England, unsecured lending rocketed in February. Indeed, the £2 billion leap in borrowing on personal loans and overdrafts was the highest figure since records began fifteen years ago. In addition, at £350 million, the increase in credit-card lending was the highest for five years.

I suspect that part of this borrowing boost stems from desperate homeowners who are turning to consumer credit in order to pay their mortgage repayments. Although this may be a short-term solution, it creates a headache in the long term.

Indeed, through the use of a Charging Order, a lender can turn unsecured lending into a loan secured against your home. In this way, personal loans, overdrafts and card debts can transform into a second mortgage which must be paid off when you sell your home. Going further, a lender can apply for an Order for Sale which, if granted, could see you evicted and your home sold to repay debts secured via a Charging Order.

In summary, if you want to hang onto your home, then you need to put your mortgage repayments at the top of your budgeting priority list. Nevertheless, you should also keep a watchful eye on your other debts, in case they overwhelm you and gobble up your home further down the line!

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