No Job, No Problem!

Lost your job? The Government will protect you from repossession for up to two years. But will it work - and is it a good idea?

Homeowners who have lost their jobs will soon be able to take a mortgage interest payment holiday for up to two years.

The new government scheme is aimed at restoring confidence in the property market and providing some breathing space to anyone under financial pressure.

It should also allay concerns about repossessions which have been forecast to increase to a whopping 75,000 next year. This is almost as many as 1991, at the peak of the last recession.

Anyone qualifying for the scheme will be able to put their mortgage interest payments on hold for two years, repaying it once they are back on their feet. Ultimately, if they cannot repay it, the government will be responsible for paying the deferred interest to the lender.

The scheme is expected to kick into effect early next year, with HBOS, Nationwide, Abbey, Lloyds TSB, Northern Rock, Barclays, Royal Bank of Scotland and HSBC all agreeing to take part.

Who will benefit

The new scheme is aimed towards people on middle incomes, with a mortgage of up to £400,000 and savings of less than £16,000.

Only homeowners who have lost their job or suffered a significant loss of income will qualify for the scheme. This could potentially include people who have been forced to take a lower-paid job or those who no longer receive overtime payments.

It is also likely to benefit those who are self-employed and are suffering from slow business, as well as those in dual-income households where one earner loses their job.

Similarly, many homeowners not covered by Income Support for Mortgage Interest (ISMI) will also be able to claim under the new scheme. 

Income Support for Mortgage Interest (ISMI)

From January, if you are forced onto benefits, you can claim ISMI after three months of falling behind with your mortgage payments. ISMI will cover the interest on mortgages up to £200,000.

Unanswered questions

Full details about the new scheme have yet to be finalised so it is still unclear exactly how the scheme will operate.

For a start, it is not clear how homeowners can claim under the new scheme and what they should do if they also qualify for ISMI.

More clarification is also needed about what can be classed as a `significant loss of income'. A 1% drop in earnings? Or 10%? Or 50%?

Details of what the Government means by 'deferred mortgage payments' also have yet to emerge. If the interest the homeowner owes continues to roll up while they are not making any payments, this will allow increase the size of the mortgage debt. As a result, after the two years are up, borrowers could be forced to substantially extend their mortgage terms in order to keep their payments affordable.

Finally, if you are on a repayment mortgage, it seems likely you would be encouraged to switch to an interest-only mortgage, but once again this has not been confirmed. If this is the case, borrowers will end up paying more overall in the long run, as my Foolish friend Jane Baker explains in this article.

Good or bad?

It is difficult to assess what kind of impact this new scheme will have until all the details have been ironed out by the government.

But my biggest concern is that it will just be delaying the inevitable. Ultimately you will still have to pay back what you owe, and very possibly more.

What's more, if the housing market takes a long time to recover, homeowners could actually find themselves in a worse off position two years down the line. Anyone faced with repossession at this point could see their home being sold for even less.

That said, the scheme has the potential to prevent thousands of people from being evicted from their homes. That in turn should restore confidence in the property market, and that has to be a very good thing indeed.

More: Home Repossessions Rise To 30,200 In 2008 | New Guidelines To Help Homeowners