If you don't look after your personal finances, then your home may be at risk. We reveal the most common way this happens.
Earlier this month, I watched a BBC Two documentary about individuals who'd lost their homes when they failed to pay their mortgage repayments. In the words of the `wealth warning' for home loans:
"Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it."
The report focused on homeowners who found it difficult to borrow from mainstream lenders. These people who have problems borrowing on the high street are known as `subprime' borrowers. As their creditworthiness is lower than a typical borrower's, homebuyers on the fringes of the mortgage market usually pay much higher rates of interest on their home loans. Hence, they are most at risk when times get tough.
The programme featured some former homeowners who (in my opinion as an ex-banker) should never have been given mortgages in the first place. For instance, a husband and wife with chronic health problems were given a loan to buy their council house, even though they were entirely reliant on state benefits for their income. Inevitably, as their interest rate rose, they were unable to meet the higher mortgage repayments. Eventually, their subprime mortgage lender repossessed (seized) their home and they were forced to move into social housing.
Among the tragic tales in this show, one case in particular took me back to the housing crash of the early Nineties. The Beeb interviewed a man in his twenties who bought his house just as prices started to take off at the turn of the century. Being an estate agent, he was confident that his property would increase in value. Sure enough, it is now worth at least twice what he'd paid for it.
However, this chap was effectively burning down his house, because basic financial mismanagement was putting his home on the line. Despite having a modest annual income (his basic salary when buying his house was just £10,000), this man had expensive tastes. Thus, in order to bridge the gap between his Champagne desires and his beer income, he had taken to spending his housing wealth.
His strategy was to remortgage every couple of years in order to unlock his housing equity. This capital could then be used to pay off his mounting debts. Alas, after several rounds of remortgaging, together with several interest-rate hikes, his `live today, pay tomorrow' plan was beginning to run out of steam.
Indeed, he faces a severe `payment shock' in early 2008, when the interest rate on his home loan is set to rise steeply. What's more, I doubt that he will be able to remortgage at all, given the limited equity that remains in his property. Also, given that over 6,400 different mortgage products have been withdrawn this summer, I think he'll struggle to find a new lender willing to take on such a reckless customer!
In my view, this guy -- despite his hot tub in the garden and Audi TT on the driveway -- was heading for financial oblivion. His chronic inability to reconcile his expensive tastes with his modest income is sure to lead to his home being repossessed and, probably, insolvency or bankruptcy. His is a cautionary tale for anyone who fails to see the dangers of living beyond their means.
In the US, more so than in the UK, `mortgage equity withdrawal' is a much more common occurrence. Indeed, our American cousins withdraw billions of housing wealth each year in order to support their lifestyles (and, much better, to invest). Last year, I came across a phrase which the Yanks use to describe the process of frittering away housing wealth on everyday expenses. It is: "Selling the furniture to pay the laundry bill"!
You may take comfort from thinking that the above scenario, while disturbing, is fairly uncommon. However, my own experience of dealing with repossessions in the aftermath of the last housing boom tells me otherwise. In fact, I never saw any homeowners lose out to lenders which had provided homebuyer mortgages. On every occasion that I witnessed, properties were seized by providers of second mortgages, secured loans or subprime mortgages.
So, don't automatically assume that your home is safe, simply because you are able to keep up repayments on your main home loan. Any additional secured loans add to your risk and could easily push you over the edge. Hence, I wouldn't advise taking out a secured loan for any reason other than to boost the value of your property through home improvements. Putting your home on the line to enliven your lifestyle with consumer goods is a recipe for disaster.
Finally, I'll leave you with a question: what is the most common cause of mortgage arrears and repossessions? Redundancy? Serious illness or accident? Divorce, separation or relationship breakdown? Death? Nope, none of these causes more mortgage troubles than old-fashioned financial mismanagement.
Indeed, according to mortgage counsellor White Horse Financial Services, poor control of personal finances accounts for close to a quarter (24%) of all mortgage arrears. In other words, many struggling homeowners are victims of their own financial clumsiness, which is a sobering thought indeed. For more information on keeping your borrowing under control, visit our Get Out of Debt centre.
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